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Making_every_penny_count
| Making every penny count...
Making every penny count…. By Lawrence Groves- July 2005
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.
About the author:
About the Author: Lawrence Groves is the Small Business
Retirement Services Director for The Retirement Group. He has
helped thousands of small businesses set up retirement plans.
Visit the site for more information http://www.solo-k.com.
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