Last Day Rule / Last Business Day

[austin3515]

Calendar year plan requires employment on last day of the plan year.  The employee works on December 30, 2016--a Friday.  Was the Participant actively employed on the last day of the plan year?  Seems we can go either way with this one...

[Bill Presson]

A prior discussion:

 

[MoJo]

Are you saying their employment terminated at the close of business 12/30 and were NOT employed by the company on 12/31 (whether it was a scheduled work day or not)?

If those assumption are correct, then they were not actively employed on the last day of the "plan year" (assuming it was 12/31).

 

[austin3515]

Mojo, your assumptions are correct.

[austin3515]

Thanks Bill!  Sounds like the IRS is saying (Example 4) that the person is not employed on 12/31 in this example.

[Kevin C]

What I got out of that IRS response works out to if the participant resigns effective 12/30, they are not employed on the last day of the year. However, if they resign effective 12/31, but their last day actually working was 12/30, they are employed on the last day of the year.  As they said, it's determined by when the employment relationship ends, not when they last worked.  In some cases, those two events are on the same date, in others they are not.  The lesson here is to be careful when your write your resignation letter

[austin3515]

Well, listen, if I get a census that says the term date is 12/30, I suppose I'm going to stop short of asking for the letter of resignation, if it's all sthe same to you :).  I'm just going to assume the employment relationship ended on 12/30.

[ESOP Guy]

I think this is one of those issues the TPA shouldn't decide.  This is one of those issue that all plan documents give the Plan Administrator the discretion to interpret the document in a reasonable and nondiscriminatory manner. 

Having said that the client is going to expect a recommendation from the TPA.  Every place I have worked the answer was:  If you aren't open on the last day of the year and the person worked on the last day the business was open and the person could have worked the plan should treat them as employed on the last day.  No employee is going to write their termination letter saying I quite as of the Saturday or Sunday after I leave for good.

I find the question given to the IRS poorly worded and thus the IRS answer is poorly worded. 

[austin3515]

Well, they very clearly said the only thing that matters is was the individual employed on 12/31.  I think they were pretty clear on that point.  And by golly if someone is terminated 12/30 then they are not employed on 12/31.

[Belgarath]

I agree with Austin. If we get a census that says termination date 12/30, then no allocation. If they say term date 12/31, then they get the allocation.

[K2retire]

3 hours ago, Belgarath said:

I agree with Austin. If we get a census that says termination date 12/30, then no allocation. If they say term date 12/31, then they get the allocation.

I agree -- but I would raise the question with the client before accepting either. Often it is something they haven't considered and the date on the census may not reflect what was supposed to happen.

[duckthing]

29 minutes ago, K2retire said:

I agree -- but I would raise the question with the client before accepting either. Often it is something they haven't considered and the date on the census may not reflect what was supposed to happen.

Based on my experience this year, I think this is the safest approach. I had a participant this year who termed 12/30 and who wasn't allocated profit sharing based on the plan's last day rule. The client called to ask why, since 12/30 was the last "work day" of the year. They understood my explanation based on what they provided and the plan language, but ended up clarifying that 12/30 was reported as her termination date only because 12/31 fell on a Saturday, and that the participant was indeed still considered "employed" on 12/31 despite that not being a work day.

It worked out fine, but from a client-happiness point of view I'll plan to ask first in the future!