Retirement Plan Consultant
Cetera Retirement Plan Specialists
Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
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|Question 280: How do the new post-severance compensation rules apply to Who's the Employer issues?|
Answer: This is the second of three articles dealing with the Who's the Employer aspects of the proposed 415 regulations. The first dealt with the erroneous treatment of Code §415(h). The final article will deal with predecessor employers.
What does that leave out? The proposed regs specifically list severance pay, unfunded nonqualified deferred compensation, and parachute payments as never being qualified plan compensation if paid after severance of employment. It also leaves out bonuses, commissions, and residuals paid more than 2-1/2 months after severance.
The military pay exception is easier to understand. If a worker leaves for active U.S. military duty and the employer decides to continue his or her pay (or the differential between what the employer pays and what the military pays), that's considered compensation for plan purposes. There's no 2-1/2 month rule here.
These regulations were issued as part of the 415 regulations. The definition of 415 compensation is used not only for section 415 limits but also for 416 top-heavy minimums, 401(a)(4) gateway minimums, 414(q) HCE determinations and 404 deduction limits.
Perhaps even more important, 415 compensation is the basis of nondiscriminatory compensation under 414(s). 414(s) compensation starts with 415 compensation and then excludes items. Plans must use a 414(s) definition in all nondiscrimination testing, including the ADP and ACP tests, and the ADP and ACP safe harbors. Most plans try to use a 414(s) definition for making allocations or accruing benefits. Even if they choose not to do so, the plan document almost always starts with a 415 definition and pares down from there.
When do you count such a participant's compensation? The proposed regulations do not change the timing rules. We don't base compensation on accrued compensation. It comes in the year when paid or made available (absent application of the "first few weeks" rule). So the 2007 payment is 2007 compensation. And the rules don't make much sense unless the plan can provide benefits based on that compensation.
Does the employer therefore have to provide the former employee with a 3% safe harbor QNEC? Absolutely, yes, if the employee can defer.
What if the employer makes a profit sharing contribution without allocation conditions? The participant shares in it.
What if the profit sharing contribution is conditioned on employment on the last day of the year? The worker is out in the cold for 2006 and 2007.
(IMPORTANT CAVEAT: These are my conclusions. They aren't official. It would be really handy if the final regulations, perhaps in the "pre-ramble," addressed these issues.)
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.