Sale of Vacation Days

[Guest MJM]

An employer is considering allowing eligible employees to sell a portion of his/her annual vacaction days to purchase benefits under a Section 125 plan. For example, an employer provides an employee with 3 weeks of vacation each year and permits the employee to use 1 week of vacation days (designated vacation days) to purchase additional Section 125 benefits.

If the employer implements this program, does it convert the designated vacation days into elective vacation days? If so, must the designated vacation days be used or cashed in by the end of the year or can the designated vacation days be carried over to the next year?

[JWK]

I'm a little rusty on these rules, but they are set forth in detail in Treas. Reg. 1.125-2, A-5©. Generally, the days that can be sold are treated as elective days and must be cashed out or forfeited at the end of the plan year. Also, the nonelective days are used first. Therefore, if you make this change, employees will not be able to carry over that elective week of vacation. And, if they have three weeks of vacation and use only one week, they can only carry over one week. The third week has to be cashed out or forfeited (because the elective days are used LAST). This rule applies to all participants in your cafeteria plan, i.e., it includes those who elected not to sell a week of vacation.

Also, if you're in a state like California that vests vacation (meaning vacation days can't be forfeited), you HAVE to cash out the elective week at the end of the year.

There are lots of issues to address in considering this change, including how to treat accrued vacation days and how to deal with all the people madly using up vacation days at the end of the year so they don't get forfeited. You can also have an employee relations issue if employees have been used to carrying over vacation days (maybe this is a problem you're trying to address).

I recommend you contact your professional advisor to thoroughly hash out the issues.

[This message has been edited by JWK (edited 11-24-1999).]