How does one shelter severence pay for retiring highly compensated emp

[Guest Brian Crosby]

I am currently working with a highly compensated school superintendent. In november he will be receiving a large severence pay of $58,000. My question is how do I maximize contributions (or shelter additional dollars) to his 403 (B) plan in lieu of $365 per pay current salary reduction? He does not have 15 years with this employer. I believe this severence pay is derived from contract with the employer and not connected with sick pay, accrued benifit, or termination pay.

The next part of my question is how do I determine how much this individual could shelter from income? This calculation does not seem to appear on the current MEA worksheet that I am using.

Thank you,

Brian

[Carol V. Calhoun]

You might look at the 403(B) exclusion allowance regulations. They provide a mechanism for former employees to continue to have an exclusion allowance. Of course, in order to avoid section 415 problems, either the contributions would have to be made in the same limitation year in which the individual was last employed or the A or B election (if available) would have to be made.

One issue with severance pay, however, is whether the pay was already earned at the time the salary reduction election was made--in which case, the election could not apply to it. A way around this is to have the superintendent greatly increase the salary reduction contributions while still employed, so as to reach the maximum before severance of employment. The severance pay could be counted as compensation, even if the contributions could not be made out of it.

[M R Bernardin]

I don't know if you can defer severance pay or not, but I disagree that the severance pay could not be subjected to a deferral election simply because it represents pay which has already been earned. 403(B) plans are on the same footing as 401(k) plans now, where deferral elections may be made with respect to pay which has not yet been made available. There is a PLR regarding post-employment contributions to a 403(B) which you may want to look at.

[Carol V. Calhoun]

Do you have the number of the PLR? It had been my understanding that at least for a long time, the IRS wouldn't allow 401(k) or 403(B) contributions out of money which had already been earned, notwithstanding the "made available" language in the statute. I'm happy to hear that they have reversed themselves on this, which never seemed justified in the first place.

[david rigby]

Sorry if this is stupid comment, but what about deferring payment into the next year?

[M R Bernardin]

A PLR in which the IRS approved a post-retirement contribution to a 403(B) plan is PLR 9625043. This PLR does not address the issue of whether severance pay may be deferred, since it involves a continuing employer contribution following retirement, not a continuing employee contribution. However, I thought the legislative history for SBJPA made it pretty clear that the prior restrictions on deferring only from pay which had not yet been earned was being eliminated by that act (as was the restriction on entering into only one salary reduction agreement per year). I think if I'm a teacher and I receive a lump sum payment of accrued vacation and sick pay in my final year of employment, I can defer from that amount as long as my contribution does not exceed the various contribution limits.