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Investing Information |
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Making Every Penny Count
More and more workers are leaving their jobs and taking their 401 k retirement plan funds with them. While some are rolling their funds over into IRAs or other qualified plans; many are taking their distributions in cash. Once an employee has left the job, any payments of earned vacation, sick or other leave made after leaving the job were not considered for inclusion in deferrals to Solo 401k, 401(k), or 403(b) plans. These plans' definition of compensation excluded any post employment earnings as the IRS excluded it from the definition. As far as these plans' were concerned, it's as if the money was never earned. Since the post employment earnings were not included in 401 k or 403 b compensation, these earnings were not a factor in any non discrimination or top heavy testing, as well as not being available for profit sharing or matching contributions. Depending upon the employers' policy on vacation, sick or other leave accumulation, this exclusion could be a substantial amount. As an example, suppose you are earning $50,000 when you leave your company. You've been working hard, haven't needed a sick day in 3 years and haven't taken a vacation in two years. You have accumulated four weeks of vacation and twelve sick days. The vacation and sick leave represent $6400 in additional income. Had you had been contributing 10% to your plan; $640 extra would have been deposited into your account. That $640 at 7% for 20 years is $2,476.60 for a 400% return. But that 400% return has been left on the table up until now. On May 25, 2005 and retroactive back to January 1, 2005 the IRS has redefined section 415 Compensation to include post severance compensation if it's paid within 2-1/2 months after separation from service. But this is only for payments that would have been paid if the participant had continued in employment or if they are for bona fide sick, vacation and other leave. The leave-related payments can be included only if the employee could have used the leave had employment continued. This new definition will still exclude severance payments due to severance of employment Employers can now amend their 401 k or 403 b plans to accommodate the new definition but may find themselves making additional contributions for compensation paid in the next year. Employees can add more contributions to their accounts. Plan administrators may find that the new definition of Section 415 compensation presents some administrative challenges in tracking the information, separating it from non eligible compensation and performing timely non discrimination testing. Lawrence Groves is the Director of the small business retirement administration services for the Retirement Group with the Solo 401k administration program at http://www.solo-k.com and the special 401(k) "Free for Three" ? administration program. Lawrence comes to his clients with over 25 years as an experienced expert in plan design, administration, and compliance. Lawrence works closely with for profit, non-profit, and government agencies on 401(k), 403(b), 457, Profit Sharing, and Puerto Rican 165(e) small business plans. Lawrence can be reached at Lawrence@solo-k.com or 727.844.7000
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