Last Day Allocation Condition

How do you interpret the last day allocation condition? The IRS language states that you should be employed on the last day of the plan year, which I believe can be interpreted 2 different ways:

1) You should be employed as of the END of the last day.

2) You should be employed during any part of the last day.

So, if someone was terminated on 12/31/2017, do they receive a contribution that has such allocation condition. The software we use would not allocate a contribution to a participant terminated on 12/31. However, I have seen some responses on the forum that state that the participant would be entitled to the contribution. Is there any additional guidance on this from the IRS?

You should be employed on the last day.

Good Luck!

If 12/31 was their last day at work, and they made an appearance, then yes, I should think they would get it.

Absolutely if someone was working on 12/31 and that was their last day, then they are entitled. Note that 12/31/2017 was a Sunday. If someone was working 12/29, and that was the last business day that the employer was open during the year on which employees could be working, that is your last day - was just reading that yesterday.

Our valuation software has the option to mark yes or no to the question:  Last day terminee considered active?

https://www.asppa.org/Portals/2/06-11-14 Presentation.pdf

see beginning at slide 88. although not formal guidance, these were based on IRS responses at previous ASPPA conference.

He/she was employed "on the last day of the plan year." I don't see how you can interpret that to be "all day on the last day of the plan year."

On 4/5/2018 at 1:16 PM, CuseFan said:

Absolutely if someone was working on 12/31 and that was their last day, then they are entitled. Note that 12/31/2017 was a Sunday. If someone was working 12/29, and that was the last business day that the employer was open during the year on which employees could be working, that is your last day - was just reading that yesterday.

I don't understand your last sentence (which is not what the questioner was questioning, but deserves a comment).  If your employment is TERMINATED on 12/29/17, you are NOT employed on the last day of the year (for a calendar year plan), even if 12/29 was the last business day of the year.  The EMPLOYMENT RELATIONSHIP does not exist on 12/31, and that is the key.  

In the original question, the employment relationship existed on 12/31 (his last day of work), so he is entitled to a contribution, and the software is wrong.  Some software (the smart ones) allow the user to set a switch so that the software is not making the decision, but the answer is clear regardless of the software.

of course, if it was an owner that quit, then wink, wink, nudge, nudge, it will turn out the individual is eligible.....

We had the 29th vs 31st conversation recently.  Here is the tread .

Edit - after more careful reading, the ASPPA presentation does in fact cite the Q&A from 2005 and there is a an additional section that does agree with the conclusion that someone who "terminates" on Friday Dec 30 is not in fact employed on Dec 31.  (But that is weirdly not supported by the two bullet points below.)  I left my whole erroneous post below...just because.  I guess my take is that someone could "terminate" on Jan 1 so their last day at work would be Dec 30 but they would be employed on Dec 31.  I remain very cautious about saying that someone who "terminates" on Fri Dec 30 is not employed on the last day.  IMO the difference between "terminating" on Dec 30 vs. Jan 1 is touchy at best and certainly any employee who voluntarily terminates would say "Jan 1" if they understood the implications.

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Original post:

Just to be clear, that prior discussion reached a different conclusion, or at least there seemed to be a majority opinion, that differs from the cited resource.

From the ASPPA text:

• If last day of a plan year = Saturday, Sunday, or holiday, and a participant is considered an “employee” on the last business day of the plan year, then the participant is considered “employed” on last day of plan year.
• Example: a retirement plan has a last day of the plan year rule and Dec. 31 falls on a Saturday. If the company usually conducts business from Monday to Friday only, and an employee’s last day of work was Friday, Dec. 30, the employee is deemed to have satisfied the last-day requirement.

(I happen to agree with that interpretation.  But it is "just" an outline from a presentation of some sort without cites.)

The prevailing view in the prior discussion was that someone who term'd on Friday Dec 30 was not employed on Dec 31.  The cite from the 2005 Q&A seems to support this position, but as Larry notes, he proposed the answer and they agreed with it, but my honest opinion is they didn't read it carefully.  (It's fair to ask "who am I to say" but I have seen it happen.)  In fact the presentation seems to use exactly the same fact patterns, including discussions about vacation time and the firm being on vacation, maybe from the same Q&A, to reach a different conclusion. 

in other words, you are left with:

I would have quit Dec 31, but the place isn't open (nor is it open Dec 30). so my last day is Dec 29. Oh, too bad, that is not the 'last day of the calendar year' so you are screwed and get no contribution. you should have told us you quit Dec 31, we couldn't schedule you that day but then at least you would have still been an employee on the last day and been eligible for a contribution.

And if the employee is an at will employee (as almost all are) and he says "I quit as of 12/31" but his last day of scheduled employment is 12/30, then the employer has every right to say "Sorry buddy: if your last day of work is 12/30, then that is your termination date". It is not up to the employee to decide when his employment status will change; that is an employer determination.  Now, it is certainly true that the employer COULD continue the employment relationship through 12/31 if they desired to.  But that is the employer's call. 

If the employee wants to make sure he is employed on 12/31, then he better work on 1/2 (or whatever day) and then quit!

Larry. 

and if the employee had 998 hours and needed just a couple more so he could get vested, well, too bad, doesn't matter if you were willing to work one more day and could, your last day was it...

oh that was the old days of 10 year cliff vesting when they used to do things like that to prevent people from collecting

I bet the DOL would be interested in such practices, thank heavens they don't arise that often.

And as you know, if an employer is "playing games" by terminating employees the day before they become vested on the old 10 year schedule (I terminated from CIGNA after 9 1/2 years on a 10 year schedule!), that was actionable under ERISA for interfering with participant ERISA rights.  Doesn't sound like this issue raises to that level, FWIW, but yes, it is something that could be a DOL issue if it was abusive.

If employed for any portion of 12/31, then the last day of the plan year allocation condition is met.

If employed on the last business day of the plan year but not employed on the last calendar day because it falls on a weekend, then I would ask the employer to interpret the plan document because neither decision is arbitrary and capricious assuming the plan document has the discretionary Firestone language where someone (typically the employer) has discretion to interpret the plan document.

We have an even more complicated situation with our ESOP. The rules are you get a allocation is you are employed on Dec 31. You receive your distribution the year following the year in which you terminate.

So we have a person whose last day working was 12/31/2021, a Friday. So they were employed on the last day of the year (not the whole day) so they would be entitled to an allocation for 2022. But then they are also considered termed on 12/31/2021, so they would get their distribution in 2022. Is that correct that for the one rule, allocation, they are employed, but are terminated for the other rule, distribution?