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Post-severance compensation


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Really stupid question here. Suppose a participant terminates employment on (X) date, and receives final paycheck 3 days later. Included in that final paycheck is a "severance" payment that would not otherwise qualify as "post severance" pay. Because the paycheck date is AFTER the severance date, this is considered under the post-severance rules, and is excluded.

Now, suppose the final paycheck date is, in fact, the day before the actual severance date. Now it just falls under the regular rules, and if plan defines as W-2, then it would be included, right? You can't call it post-severance if it is pre-severance, agreed?

Now for the real question. If paid ON the actual (X) severance date, would you classify as pre or post severance? Any "gray" on this - for example, if it was paid as a separate check instead of being included in one big, final check?

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It's a good question. We generally include post-severance pay paid during the year, but exclude it if paid after the end of the year, primarily to avoid this kind of angels-on-a-pin question.

My thoughts - just off the top of my head with no legal knowledge or research*:

In all cases, where severance pay is included in a final paycheck, whether it is before, after or on the date of severance, I believe it could (should) be considered "post-severance" pay and could (should) be excluded, if the plan says it is excluded. I would not want to have to defend that though, especially if on or before the severance date, hence the coward's way out approach in general.

*(I am now reading the FTW definition and it seems to say what you say; if paid before the actual term date it counts...but it also is narrowly defined as sick and vacation time, NOT "we feel bad and want to give you extra money." Which reinforces my attitude of generally including it in the document provisions.)

Sorry for the stream of consciousness answer.

 

Ed Snyder

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I'd have gotten this one wrong!  I have always thought true "severance pay" is never included in plan comp/allocation pay.  Your question made me pull open our ASC mass submitter document.  Here's what it says in discussing "post-severance comp": 

" Other post-severance payments (such as severance pay, parachute payments within the meaning of Code §280G(b)(2), or post-severance payments under a nonqualified unfunded deferred compensation plan that would not have been paid if the Employee had continued in employment) are not included as Total Compensation, even if such amounts are paid within the time period described in this subsection (b)."

The implication is that "severance pay" paid prior to severance IS included in allocation pay...unless specifically excluded.  I would follow the terms of our plan document.

If I had to come up with a rule for severance payments made on a participant's actual severance/term date, I'd probably include a severance payment if the participant worked on the severance date.  If the employment relationship didn't end with the last day of work, I would ask the sponsor if the employment relationship ended on the severance date or the day before.  

I've never thought it was necessary to specifically exclude true severance pay from plan comp.  I may have to reconsider that position.

 

 

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I asked this question once to the great Sal Tripodi.  We had a situation in which a bank exec was leaving and paid six months severance on their termination date.  Sal concluded that since the compensation was not paid post-severance the compensation should be included.  

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Thanks for the info. Fortunately, in the situation I was working with, the final paycheck (which included the true "severance pay") was paid several days AFTER the severance from employment date, so I wasn't worried about excluding this from the eligible "post severance pay" category. But it got me to thinking about a situation where it was paid on the severance date. 

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  • 3 weeks later...
I recently came across a situation where a friend's relative passed away, and their retirement account beneficiary designation form was deemed invalid due to missing information. This got me thinking about the importance of ensuring that our wishes are accurately recorded when it comes to who will receive our retirement account assets in the event of our passing.
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