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term date and compensation


M Norton

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SH 401(k) - 3% NEC SH, for medical practice.  Plan is terminating due to sudden health issues for doctor.  He wants to term the plan before the end of 2022.  Next-to-last payroll is 12/14/2022, last payroll would be 12/28/2022 which will include severance.  Practice does not want to pay 3% NEC on severance, so wants to term before that last payroll, probably 12/16/2022.  MD has comp in excess of $305K already.  Will term date affect his plan comp?  

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The plan does include post-severance in the definition of compensation - but that would apply only if the plan was still in operation when the compensation was paid, right?

The employees will not be terminated until 12/31/2022.

The practice wants to terminate the plan before the end of the year, maybe 12/15/2022.

Any compensation paid after that, to physician or employees, including severance, would be paid after plan termination.  That compensation is what the plan sponsor wants to exclude.  Is that possible?

 

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So it would be pay after the termination date of the plan getting excluded.....rather than (specifically) pay after the termination of employment.  

I've never actually seen the rules regarding exactly how to prorate compensation against 401(a)(17) if you have a mid-month plan termination date, such as if you did terminate as of 12/15....whether you can use days/365 or 11.5/12 or only 11/12 for actual full months.

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I agree with msmith, severance pay or pay that you are getting because you are no longer working here, is not considered plan compensation.  If you are creating a short plan year, you will have to pro-rate the 305,000 and the Drs compensation will be less than that for SH %.

 

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I agree with msmith and PamR regarding inability to treat true severance pay as 415(c) comp, but for anyone who comes across this post and has the opposite purpose (i.e., they want to contribute based on the special payment), I would point out that as long as the payment is not made to fulfil a state or local (or union) severance benefit requirement, you could just say it's a bonus for having been great employees.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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