NEWSLETTERS
 Volume 7, Issue 1 .................... January 2007

New Post-Severance Pay Rules

The IRS has issued proposed regulations under Section 415 of the Internal Revenue Code, including rules on compensation after termination of employment.  These rules can be used currently and all plans using the Administrative Retirement Services, Inc. plan document were amended to incorporate these rules effective for plan years beginning on or after January 1, 2006.

Previously, specific rules regarding whether post-severance compensation could be used for plan purposes was not available.

Based on the new regulations and the plan document provisions, certain types of post-severance compensation are used for plan purposes if paid to an individual within 2½ months after the individual’s termination of employment.  The following are types of post-severance compensation which are included as compensation for plan purposes:

  1. Payments such as overtime, commissions, bonuses or other similar compensation which would have been paid if the individual continued to be employed.

  2. Pay for accrued sick, vacation or other leave if the leave could have been used if the individual’s employment would have continued.

Thus, employee 401(k) contributions should be deducted from these types of post-severance compensation and these amounts are included as compensation for other contribution allocations and for the plan testing.  However, these types of post-severance pay can not be used for plan purposes if paid more than 2½ months after an individual’s termination of employment.

In addition, some post-severance pay can never be used for plan purposes under the new rules.  This pay includes pure severance pay or parachute payments.

This article is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice.

Contact Administrative Retirement Services, Inc. if you have questions about the above provisions.


© Administrative Retirement Services, Inc. 2006
Published by Administrative Retirement Services, Inc., Copyright 2006 by Administrative Retirement Services, Inc. Reproduction in whole or in part is prohibited except by written permission. All rights are reserved. Information has been obtained by Administrative Retirement Services, Inc. from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Administrative Retirement Services, Inc. or others, Administrative Retirement Services, Inc. does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Readers should seek specific advice before acting with regard to the subjects mentioned here.

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