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 Post subject: 401K - In Final Termination Pay-out
PostPosted: Thu Apr 21, 2011 11:44 am 
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Joined: Wed Feb 27, 2008 6:11 pm
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Should we deduct 401K from a terminated employees vacation/pto payout? This is a separate check from their regular check which would have 401K deductions. Or, is it according to our 401K plan?


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Thu Apr 21, 2011 11:50 am 
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Does your plan otherwise include vacation/pto as eligible compensation?


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Thu Apr 21, 2011 12:18 pm 
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Agreed. You have to read YOUR company's plan. I have worked for different company's whose plans handle this differently.

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Not your question, but if I was writing the plan, I would include any wages which would be quickly paid upon termination, but formally exclude any wages which would not be paid quickly. Otherwise you have exactly the same employee whining because YOU are holding up THEIR 401(k) distribution. Much easier to finalize the 401(k) as soon as possible after termination. Let the employee whine at the trustee instead.

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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Thu Apr 21, 2011 1:22 pm 
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Thanks for your help, just confirmed thru our plan that we will take the 401K deduction.


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Fri Apr 22, 2011 1:38 pm 
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Joined: Wed Apr 16, 2008 11:29 am
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Location: Chicago
so i'm confused, why would it matter what the company plan says? when the employee signs up, aren't they agreeing to have whatever amount withheld from their compensation? how would the last check differ? it's still compensation.


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Fri Apr 22, 2011 1:51 pm 
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The plan document ALWAYS matters because it is the controlling legal document that allows the deferrals to happen, and plan documents can be written differently by every company and violating your written plan could carry big penalties. So when an employee signs up they are agreeing to have the amount withheld from whatever the plan says their eligible compensation is. So maybe the plan document says vacation pay is not considered compensation for deferral purposes, or maybe the plan document says no deferrals will be taken from any paychecks issued after termination. Rule#1 with 401ks is follow your plan document.


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Fri Apr 22, 2011 3:04 pm 
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Very agreed. The IRS (if/when the audit occurs) will hold the employer to the exact wording of THEIR plan. I worked for a company in the 1980s who kept all part time workers out of the 401(k). That was NOT what the plan said. The plan did not mention part time at all and just said after xxx days, all employees were eligible as of the next signup period. That little gem cost us $250K in fines.

My next job the plan said that "wages" were subject to deferal. Which "wages". Vacation? Bonus? How about imputed income like GTL or company provided auto? How about stock for executives that vest as long as 4 years after termination? One of the very first things I do when going to work for a new employer is to get current copies of the benefit plans and READ THEM. One line at a time. Take notes. Then I sit down with HR and ask these sorts of questions and politely remind them that IRS is called a "hostile" auditor for a reason. If the company violates the plan rules, IRS issues a fine. If the plan rules are unclear, IRS still issues the fine, because it is the employer's fault the plan rules are unclear. Give HR a chance to clearly rewrite the benefit plans into something that can actually be complied with.

This is a really big deal. The place that took the $250K hit in the 1980s fired the entire HR department. I could have been fired just as easily. I did not setup the plan, but I also never thought of asking HR for a copy and reviewing it.

The job you save here could be yours.

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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Mon Apr 25, 2011 8:26 am 
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Joined: Wed Apr 05, 2006 7:19 am
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Location: my little world
Having worked 7 1/2 years for one of the largest HR consulting firms in their 401k group, I totally agree with David. It is VERY important to exactly follow the 401k plan document. Even a small error can be costly. Many can not just be un-done easily. Very few have easy fixes.

And yes, 401k plan compensation can have many different definitions/formulas. Actually it used to be a lot worse than it currently is. It has standardized a bit with prototype plan documents...but still can be different. If your payroll system hasn't been audited against the 401k plan document lately, it is worth the time it would take to be sure it is correct.

And with the 401k errors -- you actually not only have the IRS involved due to the pre-tax benefits, but also the DOL due to ERISA. Othen BOTH would charge penalties for the same mistake. Not a fun thing to be in the middle of. Please don't ask how I know!


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Mon Apr 25, 2011 10:18 am 
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401(k) plans are like parachutes. The time to check them is before you jump. All the really good options go away once you leave the plan (or the audit starts).

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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Mon Apr 25, 2011 11:51 am 
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Joined: Wed Apr 16, 2008 11:29 am
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Location: Chicago
Mindy wrote:
The plan document ALWAYS matters because it is the controlling legal document that allows the deferrals to happen, and plan documents can be written differently by every company and violating your written plan could carry big penalties. So when an employee signs up they are agreeing to have the amount withheld from whatever the plan says their eligible compensation is. So maybe the plan document says vacation pay is not considered compensation for deferral purposes, or maybe the plan document says no deferrals will be taken from any paychecks issued after termination. Rule#1 with 401ks is follow your plan document.


oh geez...... i guess i was under the assumption that the IRS actually set some kind of guidelines in the actual 401k irs code.

great... now i've got the feeling i have to read some boring a** company 401k plan. thanks guys!


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Mon Apr 25, 2011 12:15 pm 
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While 401(k) is definately the potentially scariest benefit plan for audits, it is not the only. Also take a hard look at your medical plan (ERISA/DOL). This is generally more of HR issue, but you should still get (and read) a copy of the SPD. Then there is the Section 125 plan (if any). The rules changed big time in 2009. If your plan is older then that, then it is out of compliance. Past that, the compliance rules for S125 are now quite similar to 401(k). For the first time there is not only serious potential compliance penalties, but IRS is actually auditing S125 plans for the first time (because of the big possible penalties). Mess up on one of these plans and Very Senior Management will fire as many payroll/HR people as are needed to protect their jobs.

Those are the "big three" because there are serious federal rules involved. Past that, some states have rules which may be interesting with other types of benefits. For example, CA and vacation. Most of the "other" benefits are mostly HR's problem, but payroll people need to read IRS publication 15B (Fringe Benefits) and make sure all payroll actions are in compliance with those rules. Do not assume that HR's knows or cares about any IRS issues. I had a large employer whose large expensive HR department was somehow unclear that the Educational Assistence Plan's rules (EAP) were not optional. While that is not a "hard" plan compared to some of the others, failing to follow the rules could cause all EAP payments to retroactively become taxable wages to the employees. Same with Qualified Transportation. Smart payroll people do not assume that HR knows what they are doing. Some do. Some do not.

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Philip K. Dick (1928-1982)


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 Post subject: Re: 401K - In Final Termination Pay-out
PostPosted: Sun May 08, 2011 7:30 pm 
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Joined: Thu Jun 12, 2003 3:14 pm
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Location: Carrboro, NC
Quote:
i guess i was under the assumption that the IRS actually set some kind of guidelines in the actual 401k irs code.


They do - but there are options in the guidelines - Since the employer may make contributions to the 401(k), the employer gets to decide which compensation is included in the formula.

One of the (not so much guideline) rules is that you make the contributions based on the provisions of the plan. If you do something else, you are not in compliance with the plan and, therefore, you are not in compliance with the regulation. The plans must be written within the guidelines (that's what guidelines are - the boundaries for what you can do within the rules - sort of like the sidelines in football or tennis - go outside, and you are out of bounds - inside there are a number of things you can do so long as you play within the rules. But you don't have to do all of them. You do have to decide how you want to play (touch football, high school, college, pro, area, flag) - the basic rules are the same, but the details are determined by which game you are playing - tackle someone in touch or flag football, and you might be ejected from the game.

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Pat, EA in NC
Circular 230 Disclosure: This advice is not intended or written to be used, and it cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.


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