Pay with no hours

[Cynchbeast]

We have a client with a prior employee who threatened to sue for wrongful termination.  She terminated in 2015, but the employer settled with her through arbitration.  She was therefore paid an agreed upon amount (not yet provided to us) through payroll in 2016 but worked no hours.

Q:  For 2016, is she included in testing as non-benefitting, or excluded altogether? Since she worked receive pay in 2016?  And if I include her, do I include at 0 hours, or equate the pay to some amount of hours? 

[Lou S.]

What is the Plan's 415 definition of compensation?

Is this pay for services rendered, or post-separation severance package?

[BG5150]

Sounds like severance

[RatherBeGolfing]

If it is a settlement or severance pay as Lou points out, it shouldn't be plan comp as it is not pay for services.  It will be very important to find out exactly what her payment is, but it shouldn't be used simply because they run it through payroll. 

[K2]

It sounds like excluded severance to me, but I suppose it might matter based on the terms of the settlement.  Is this additional compensation for hours already worked?  Would you then go back and revise an earlier year to reflect higher compensation?  I think not, but worth considering...

[Belgarath]

See 1.415(c)-2(g)(8).

[K2]

Good cite.  So now it sounds more like back pay to me, and it has no impact on 2016 testing, but additional contributions may be owed for 2015 based on a higher 2015 salary.

[RatherBeGolfing]

I would be very careful with any kind of settlement payment.  Just because it sounds like back pay does not mean that is what it is.  You have to look at the specifics of the settlement.  Back pay is compensation you were supposed to get for services rendered but did not get.  The original post does not mention anything about the participant being underpaid, only that she threatened to sue for wrongful termination and the company ended up settling during arbitration.  That sounds like severance to me, which is a payment for the termination itself, and not services rendered. 

[BG5150]

I'm with RBG on this one.