Converting Leave to Pre-Tax Plans

[Guest Bob Carter]

The other day, a friend of mine sent me a few questions on conversion of benefits to other types of plans versus getting payouts in cash. Her questions spurred me to post them here:

1. Do you allow employees who resign (and are due vacation pay) to convert the vacation payout into a deferred compensation plan? If so, is their a "tax" issue since paying it out would be taxable? Also, is there an issue for unemployment comp since the former payout is treated as wages earned?

2. For employees who might lose vacation and/or sick leave once they have reached the maximum, do you allow the cash value placed in their 401k, 403b, or 457 plan?

3. Do you allow those retiring to convert vacation pay out into a special pre-tax medical or post-retirement account for purposes of payment of medical expenses?

Bob Carter

Guilford County Government

Greensboro, NC

[Joe Priselac]

Bob,

Some of the options that you have described are commonly negotiated items in governmental employer labor agreements. We work with many governmental employer groups and have encountered these types of options. Governmental employers subject to collective bargaining are exempt from many rules that normaly apply to private sector employers.This has spawned some fairly creative benefit options. If you want additional information, feel free to contact me.

[Guest nb]

Bob,

I think an important thing to remember is that it is a timing issue. If you create taxable income by way of a vacation payout, you can make arrangements to process a contribution to a tax deferred plan, such as a 457, at the same time. It may have the appearance of a conversion of benefits but it is two seperate actions. You are still limited to the contribution limitations that your 457 plan may contain.