Expert: Allen - 6/8/2005

Question
my employer is laying off many of our employees and is giving a lump severence payout.  we are being told that there will be no money taken out for a 401k contribution and also therefore no company match.  it would seem that the payout should be treated exactly as a paycheck since every other deduction will be the same.  we have convinced them that they should make the 401k contribution for our vacation and sick pay we have accrued but they insist the severence is somehow different.  any thoughts?  would it make a difference that some are taking a voluntary layoff while others have no choice.  in either instance people are getting the same letter stating that the separation is due to lack of work.  thanks for any assistance you can give.  we are losing in excess of 200 good employees and i want them to get everything they deserve.  thanks again, david.

Answer
There is a important recent development that I forgot about when I sent my earlier response.

The IRS just issued proposed regulations under Section 415 of the Internal Revenue Code and these regulations do address your question.

The IRS is now saying that compensation CAN include post-severance payments provided they are received within 2 1/2 months of severance and they would have been paid if the participant continued in employment or if the payments are for bona fide sick, vacation or other leave that the participant could have received if he had continued in employment.

On this basis, the interpretation by the company to include unused sick leave but not severance pay for purposes of the 401k plan may be reasonable.