Loan Payments From Severance

Was having a discussion with another consultant in the office. In my opinion, loan payment deductions from severance pay is perfectly fine and perhaps even required? The 415 regulations in my opinion disallow using severance towards contributions. But allowing severance pay to be used towards loan payments is perfectly fine.

I am curious to know if others agree with that? I googled for a nice article that mentioned this, but was not able to find one.

I don't see any particular problem with it. If the loan payments didn't come directly from the severance pay, presumably the former employee would get a direct deposit of the severance pay and use it to make the loan payment. 

Severance pay shouldn't delay the employee's termination date under the loan default provisions. So if there's a default within, e.g., 30 days of termination, I don't think that should be extended during the severance period, even if loan payments are being made from severance. 

Interesting point about the date of term fixing the default.  Typically the severance I see is a couple weeks to a month, but I have of course seen the 6 to 12 month ones as well where that would be an important consideration...

The source of the loan payment is 100% irrelevant.  The agreement to withhold it from payroll is the same as if I direct the employer to direct deposit a portion of my paycheck to a bank account in Clydebank, Scotland.  The withholding agreement should remain in force until there is no more payments to process through payroll, it's not subjective to the type of income.

Agree with all comments above, including the termination date and accelerated loan due date, if applicable. If person gets 6 months of severance after termination date, for example, and plan provisions make loan due upon termination of employment, you can't run the loan out 6 months paying from that severance. If plan allows terminated employees to keep repaying their loans, then no issue.

Could this be allowed but solely through payroll withholding, i.e., only for employees getting severance? I'd be curious to hear what others think about that. Depending on the company, I could see discrimination in practice/operation if only/predominantly HCEs are ever entitled to severance, but companies with general/generous severance plans, why not?

When an employee terminates employment the loan balance normally reduces the vested balance of the account that can be rolled over by the Participant or taken as a direct distribution.   Using severance pay is fine, but the loan repayment must be in after tax dollars.  Is this the best option for the employee from an income tax point of view?   Might not the severance pay kick the employee into a higher tax bracket.  This makes me uncomfortable.  

From a divorce context, if an Alternate Payee is going to receive a share of the Participant's 401(k) plan, outstanding loans can be included or excluded. If they are included, then they are ignored for purposes of computing the value of the account, and the full amount in the 401(k) plan may be marital property.  But severance pay is not considered marital property in most states. See below.

Most states that have considered it have held that severance pay is a substitute for income lost while the employee looks for a new job and is not a form of deferred compensation that might be considered to be marital property.  Even if severance pay is viewed as “marital property”, it is not a qualified plan and is not enforceable with a QDRO or other court order.  Or isn’t it just “income” for child support and alimony purposes? 

In Sharp v. Sharp, 58 Md.App. 386, 473 A.2d 499 (1984), in a discussion of dissipation of marital property, the CSA, cited, “In Re the Marriage of Faulkner, 582 S.W.2d 292, 295-96 (Mo.App.1979) (where jointly owned stocks were endorsed by husband and cashed by wife without sharing the proceeds, and where bank accounts containing wife's severance pay and retirement benefits were appropriated solely by the wife, the trial judge did not abuse his discretion by including these depleted assets in the division of marital property);”  Faulkner was also cited in Ross v. Ross, 90 Md. App. 176, 600 A.2d 891 (1992).       But if you read the Faulkner case and other cases from Missouri, you will conclude that the Faulkner court was including the severance pay in its determination of a marital property award, and not as marital property itself.  And there is a statute in Missouri that specifically describes severance pay as an element of income. 

    Read the unreported decision in Pisano v. Pisano - Nos. 0853 & 2019, September Term, 2014, Court of Special Appeals of Maryland (2015) -
https://scholar.google.com/scholar_case?case=16952077831845019052&q=pisano+v.+pisano&hl=en&lr=lang_en&as_sdt=4,21&as_vis=1

    If you want to dig a little deeper, see: 

    1. Siljendahl v. Siljendahl, Not Reported in N.W.2d, 2009 WL 511302, Minn.App., March 03, 2009 (NO. A08-0509)
    2. In re Marriage of Lodeski, 107 P.3d 1097, Colo.App., November 18, 2004 (NO. 04CA0515)
    3. Ash v. Ash, Not Reported in S.E.2d, 2004 WL 555478, Va.App., March 23, 2004 (NO. 1943-03-2).  
    4. Dunnan v. Dunnan, 261 A.D.2d 195, 690 N.Y.S.2d 46, 1999 N.Y. Slip Op. 04542, N.Y.A.D. 1 Dept., May 13, 1999 (NO. 1044, 1043).
    5. Luczkovich v. Luczkovich, 26 Va.App. 702, 496 S.E.2d 157, Va.App., February 24, 1998 (NO. 2975-96-2)
    6. Flynn v. Thompson, Not Reported in A.2d, 1997 WL 908393, Del.Fam.Ct., December 01, 1997 (NO. CN96-07917, 96-13266)
    7. In re Marriage of Heupel, 936 P.2d 561, 21 Colorado Journal 575, Colo., April 21, 1997 (NO. 95SC754)
    8. In re Marriage of Flud, 926 S.W.2d 201, Mo.App. S.D., June 26, 1996 (NO. 20311)
    9. McClure v. McClure, 98 Ohio App.3d 27, 647 N.E.2d 832, Ohio App. 2 Dist., October 05, 1994 (NO. 93 CA 79)
    10. Ressler v. Ressler, 434 Pa.Super. 563, 644 A.2d 753, Pa.Super., July 06, 1994 (NO. 03657 PHL 1993)
    11. In re Marriage of Miller, 888 P.2d 317, Colo.App., June 02, 1994 (NO. 93CA1240)
    12. Moore v. Digital Equipment Corp., 868 P.2d 1170, Colo.App., January 27, 1994 (NO. 93CA0569, 93CA0223)
    13. In re Marriage of Holmes, 841 P.2d 388, Colo.App., October 08, 1992 (NO. 91CA1415)
    14. Hutto v. Hutto, Not Reported in S.W.2d, 1992 WL 162870, Ark.App., July 08, 1992 (NO. CA 92-51)
     15. Ryan v. Ryan, 261 N.J.Super. 689, 619 A.2d 692, N.J.Super.Ch., June 01, 1992 (NO. M-602-90)
    16. Mears v. Mears, 305 S.C. 150, 406 S.E.2d 376, S.C.App., June 10, 1991 (NO. 1667)
    17. Dillard v. Dillard, 28 Ark.App. 217, 772 S.W.2d 355, Ark.App., June 21, 1989 (NO. CA88-359)
    18. Gentry v. Gentry, Not Reported in S.W.2d, 1986 WL 11477, Tenn.Ct.App., October 16, 1986 (NO. 85-318-II)
    19. Robert Fensterer v. Gloria D. Fensterer, 1985 WL 384550, 13 Phila.Co.Rptr. 51, Pa.Com.Pl., June 05, 1985 (NO. NO. 7995.)
    20.  Lawyer v. Lawyer, 702 S.W.2d 790, 288 Ark. 128 (1986) 
    See: 317 cases nationwide collected at - 
http://scholar.google.com/scholar?q="severance+pay"+"marital+property"&btnG=&hl=en&as_sdt=ffffffffffffe04
  

 See the recent case of  Zgrablich v. Cardone Industries, Inc., Civil Action No. 16-4665 (U.S.D.C. ED. Pa. 2016) discussing whether or not a severance plan can be ERISA qualified. 
https://scholar.google.com/scholar_case?case=13502510190377230837&q=Zgrablich+v.+Cardone+Industries,+Inc.&hl=en&as_sdt=4,39,361