Safe Harbor Contribution on Wage Settlement Penalty

[Zoey]

I need some guidance as to what someone would do in this situation, or if anyone knows of a cite that they can refer me to.

I have a client who was sued (settled 2018) by an employee for vacation pay from 2016.  For simplicity, let's say they were awarded $3,500.  The client was also ordered to pay a penalty on that amount of say $1,500. 

The plan is a safe harbor non-elective plan.  The client then submitted the 3% SHNE contribution on the $3,500 plus lost earnings on the $3,500.  The participant is now asking for the 3% ($45 plus lost earnings) on the $1,500 penalty.  

Here is what the SPD reads (for the readers digest version)...

Does plan compensation include monies paid to me during an absence or after my employment ends?

Usually, only the amounts paid to you while you are an employee are considered plan compensation (described above). However, the plan may consider certain types of pay as plan compensation, though paid during an absence or after you leave employment.

 If you are totally and permanently disabled, compensation under your plan will not include disability related salary continuation payments.

 Payments you receive after terminating employment might be considered plan compensation, if they meet the definition of "post-severance compensation. "To be considered post-severance compensation, the payment must be one that you would have received had employment continued, such as your salary or wages. Post-severance compensation does not include severance pay, or other amounts you receive only because your employment ended.

To be included in plan compensation, post-severance compensation must be paid to you by the later of the end of the limitation year in which your employment ends, or within 2-1/2 months after the date your employment ends.

Payments for unused accrued sick, vacation, or other leave that you would have been able to use if your employment had continued are not included in your plan's post-severance compensation.

Thoughts?

The debates here, are several...1) She should not have gotten the SHNE on the vacation pay to begin with.  2) Vacation pay could be considered post-severance compensation (as she would have received it, had she not terminated), but the last paragraph kind of negates that.  3) None of it was paid within 2-1/2 months after employment ended.

Thanks in advance!

[Luke Bailey]

Zoey, I think probably the rule you're looking for is Treas. reg. 1.415(c)-2(g)(8), dealing with back pay awarded by administrative agency or court. The way I would interpret the rule I think what you describe your client as having done seems correct. Making a contribution based on the penalty amount would seem to violate 415 because the penalty would not be comp under this reg. But I would need to review the settlement docs, the plan, etc. etc. to really say anything definitively.

[Zoey]

Luke, I apologize for not responding sooner, I was on vacation.  I agree with not making the contribution based on the penalty amount.  Unfortunately, I too, am not privy to the settlement docs.  I have requested them, to no avail.

Thank you so much for your input Luke.  I appreciate it.