Pay in lieu of notice

[7806akp]

If an employee provides 2 weeks' notice to his/her employer of a voluntary termination of employment and the employer chooses to immediately terminate the employee but pay the employee in lieu of requiring the performance of services during the 2-week notice period, is the 2 weeks of pay "regular pay" from which 401(k) plan deferrals can be made?

[ETA Consulting LLC]

Yes.

Good Luck!

[QDROphile]

Unless the plan says otherwise.

[ETA Consulting LLC]

My line of thinking is that it is not Severance Compensation, because this is compensation that would've been received had the employee remained in service. As we know, Severance Compensation (e.g. basically Compensation paid because you're being severed that would not otherwise be payable should you remain employed) is not benefits eligible. So, you're looking at the equivalent of some paid time off such is vacation pay.

A plan may be drafted to exclude post severance Compensation (which is merely compensation paid after you terminate) from being eligible Compensation; but even then you have an argument that the participant is employed throughout his notice period, but merely not working at the request of the employer. I would be interested in knowing what termination date is being recorded on the employment records with the employer. I don't know much about labor law, but it would appear more consistent if the employment termination date is the end of the two week notification period. Otherwise, you have effectively fired the employee for resigning. Again, I don't know labor law, but could imagine a situation where someone provides a notice that they're leaving at year end (while the plan has a last day of employment provision).

It would make for an interesting case should that employee be deprived of the right to earn those benefits merely because they provided a notice that they're leaving.

Good Luck!

[QDROphile]

ETA:

Your thinking is correct and preferable. It is still possible to have a plan exclude the compensation through some combination of definition of compensation and employer characterization of the end of service. It is not always saying anything terribly interesting to remind about checking plan terms.

[ETA Consulting LLC]

It is not always saying anything terribly interesting to remind about checking plan terms.

You'll NEVER hear me object to it

[david rigby]

It might also be prudent to verify what DOT is shown on employment records, rather than assume a particular date.

[RatherBeGolfing]

It is not always saying anything terribly interesting to remind about checking plan terms.

You'll NEVER hear me object to it

Rule number one, RTFD (Read The F...antastic Document)

[austin3515]

I disagree with the conclusion, I think it is severance. When you get paid unused sick time, you're getting pay for the days you worked. It just so happens you didn't take the time off you were entitled to and instead worked. In this case, no work is performed for the 2 weeks pay. The rationale of "the pay would have been received had the employee continued" is not what they are referring to. They are referring to pay that was earned before severance. e.g., commissions, performance bonuses, final paychecks, paid time off.

The mere fact that that the employee wrote down on a piece of paper "I'll work if you want" is not materially different from the employer terminating the employee with no notice and paying them 2 weeks severance.

Does anyone change their mind?

[QDROphile]

What got me started was a provision in a good form of plan document that expressly covers the circumstances to make it clear that the compensation is included/eligible. The same document excludes severance. The issue is not so much a legal one as a plan interpretation question, but the plan has to be applied according to the facts, including actual employment status. With such an express provision, the employer and employee can get the outcome that is desired and fits the subjective intent. I have never seen another plan document with such a helpful provision set out clearly.

[austin3515]

Well, isn;t the question "can you use it in the first place"? If it is "severance" it is not legal to use it. I would be curious to see what the language you are referring to actually says.

[GMK]

FWIW, having it spelled out in the Plan Doc would be best, but I would not have a problem calling this "extra vacation pay" earned on the day before termination, or something similar, if future terminating employees are offered the same deal, to avoid discrimination charges.

The employer may also wish to look into how it affects other benefits. For example, if the DOT is out 2 weeks (with the employee not required to show up during those 2 weeks), is the employment extended into the next month, and is the employer then required under ACA to offer medical coverage for another month? and like that.

[ETA Consulting LLC]

I disagree with the conclusion, I think it is severance. When you get paid unused sick time, you're getting pay for the days you worked. It just so happens you didn't take the time off you were entitled to and instead worked. In this case, no work is performed for the 2 weeks pay. The rationale of "the pay would have been received had the employee continued" is not what they are referring to. They are referring to pay that was earned before severance. e.g., commissions, performance bonuses, final paychecks, paid time off.

The mere fact that that the employee wrote down on a piece of paper "I'll work if you want" is not materially different from the employer terminating the employee with no notice and paying them 2 weeks severance.

Does anyone change their mind?

"Severance Pay" is not defined as "pay received after severance"; that would be post-severance pay. Severance pay is pay that is received "because" you are leaving and would not otherwise be paid if you are staying employed.

In this case, it's not Severance Pay. Depending on the date of termination on the employment records; it may not be post-severance pay. (This was the root of David Rigby's reponse; verify the Date of Termination).

However, let's assume the employer approached the individual and said, "We're downsizing and do not need your services any longer. We'll have you work through the end of the week and pay you for that time; an amount of $1,000. Additionally, because you are being severed (laid off, job abolished, etc....), we're giving you 10 weeks of pay ($10,000). In this instance, you'll receive $11,000; $10,000 of which would be Severance Pay (because this is an amount that you wouldn't have received had you remained with the company). Now, the $1,000 would be Post-Severance Compensation merely because you received your check after you terminated employment.

[[Not to change the subject, but it's like saying the pre-tax amounts that you contribute to the plan out of your paycheck is not an employee contribution; but an elective deferral. However, should an HCE contribute too much and receive a refund, it will be an excess employee contribution; not an excess deferral. An excess deferral is a 402(g) violation.]] I guess the point I'm making is that when you see a term in a document with a capitalized letter (i.e. Severance Pay), the document should have a definition of it. In this case, the Regulations in Section 415 makes this distinction.

Good Luck!

[QDROphile]

We are getting a little off point, but severance pay is eligible for elective deferrals unless paid after separation from service. It is not that unusual to pay a severance amount on the last day of work to allow the employee the choice, although the average Joe is going to maximize current cash if it is the last income expected for a while. If the employee is stepping right into the next job, the deferral may be desired.

[austin3515]

I still don't like it. Let's talk about severance. The argument of "they would have received the pay had their employment continued" has been made many times even about severance. "If my employment had continued, I would have been paid for those 10 weeks!" I know we have all heard that argument from people and "batted" it down and said no no no, the comp was never earned.

I am sorry I just do not see any material difference between 2 weeks notice refused but with payment provided, versus 2 weeks of severance with an involuntary termination. They are both essentially involuntary terminations with salary continuation.

I guess I'm going to stop posting about this now though...

[ETA Consulting LLC]

I am sorry I just do not see any material difference between 2 weeks notice refused but with payment provided, versus 2 weeks of severance with an involuntary termination. They are both essentially involuntary terminations with salary continuation.

The difference is the cause. If you work 10 weeks, then you're going to get 10 weeks of pay; in the same manner you were paid for the last 10 weeks you worked. So, this is "regular pay" for work that was performed. Severance Pay is when you say "BECAUSE, you are being severed (and for no other reason), we're giving you this pay.

If you work and receive pay every other Friday, then you are assured a paycheck if you remain employed and working until Friday, ceteris paribus. So, merely terminating employment before Friday, but continuing to receive that paycheck is regular pay. Heck, that paycheck could be for two weeks in the hole or for work performed during a pay period that ended last week. The point is, your receiving the same check you would've received had you remained working (even though it may have been a little more due to more hours being worked).

This is different from saying; we're giving you this parting pay because there is no more work for you here.

This is merely what I'm reading from the 415 Regulations. When I read these, I try to ascertain the meaning without incorporating my own caveats in order to ensure I'm doing things correctly. Heck, sometimes I miss, but I have an entire army of experts that won't hesitate to provide me the needed insight

But, if I cannot see a difference between Severance Pay and Post-Severance Regular Pay; then I'm going to continue to read the Regulations until I see a distinction that makes sense, because (the one thing I do know is that) the Treasury wouldn't have taken the effort to write the additional sentences explaining a difference if there wasn't one

Keep in mind that we operate in an industry where regular words carry meanings that seems to undermine the English Language. "What in the heck do you mean the estate is not a 'designated beneficiary'? It's the beneficiary the participant designated!"

Good Luck!