ARTICLE

Deferring Severance Pay

There have always been questions concerning whether payments made to a terminated employee can be deferred under a 401(k) plan. One view is that the employee can only elect to defer amounts that are paid while he or she is still an employee. Another view is that the employee should be permitted to defer any amounts that are treated as W-2 wages.

The IRS has proposed regulations that would prohibit employees from making elections to defer amounts paid after severance from employment unless:

  • The payments are made within 2-1/2 months following the employee's severance from employment; and
  • The amounts would have been payable if employment had not terminated (e.g., regular compensation or payments for overtime, commissions, or bonuses) or are paid with respect to leave that would have been available for use if employment had not terminated.

401(k) Plans -- New Features And Compliance Rules Effective For 2006

Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.