Severance Payments & Employer Contributions

We have a client who has an employee who is only receiving severance payments and no other salary.  I just wanted to confirm that all of that compensation is ignored, and therefore they wouldn't get any type of contribution (Profit Sharing, obviously not since they are under 1,000 hours, but a Top Heavy contribution was my only thinking).

Thanks in advance.

"Trailing" post-severance compensation that meets the 2 1/2 month rule is included.

Other forms of post-severance compensation (unused leave cashouts, certain nonqualified deferred compensation, salary continuation for disabled participants or military members, etc.) are all governed by the plan document, so you'll have to refer to your specific plan. Our plan documents made through ASC default to include post-severance compensation, with the ability to exclude the various types above. 

Not legal advice, YMMV

9 minutes ago, Miles Leech said:

"Trailing" post-severance compensation that meets the 2 1/2 month rule is included.

Other forms of post-severance compensation (unused leave cashouts, certain nonqualified deferred compensation, salary continuation for disabled participants or military members, etc.) are all governed by the plan document, so you'll have to refer to your specific plan. Our plan documents made through ASC default to include post-severance compensation, with the ability to exclude the various types above. 

Not legal advice, YMMV

Right, but technically the participant isn't employed on the last day of the Plan Year so they shouldn't get the Top Heavy contribution.  I'm problably overthinking this though

3 hours ago, metsfan026 said:

Right, but technically the participant isn't employed on the last day of the Plan Year so they shouldn't get the Top Heavy contribution.  I'm problably overthinking this though

You are correct, terminated employees do not need a top heavy contribution, provided their termination date is before the end of the plan year for the year in question. Under §415, which to my knowledge is required to be used for top heavy minimums, severance pay is not included in compensation.  

I think you are missing the point here - the question/issue is severance pay not post-severance compensation. The person is no longer employed and severance pay (per IRS) is never plan compensation.

8 minutes ago, CuseFan said:

I think you are missing the point here - the question/issue is severance pay not post-severance compensation. The person is no longer employed and severance pay (per IRS) is never plan compensation.

CuseFan is correct here, that's my mistake. I directly referenced the definition of wages under §3401 (which normally does include severance payments), forgetting §415 carves out exclusions & modifications. Been a long day, rookie mistake on my part; editing my original response now.

Thanks for catching that!

23 hours ago, Miles Leech said:

Thanks for catching that!

No worries, no one is 100% here and we respectfully correct or disagree with each other when appropriate - that is what's great about this forum, it makes us all better.