SIMPLE IRA Employee Contribtuions
When an employee is compensated for severence pay, is that compensation treated the same as regular payroll for EE SIMPLE IRA contributions?
When an employee is compensated for severence pay, is that compensation treated the same as regular payroll for EE SIMPLE IRA contributions?
Permalink Submitted by Alan Spross on Thu, 2010-07-08 20:49
This is a tough issue, one that has been debated.
Basically, payments post severance that are NOT payments of income earned prior to separation are NOT considered as retirement plan compensation.
But some have argued that formal severance plans that pay per formula (eg 1 or 2 weeks per year of service) represent earnings that were actually earned prior to separation.
Conclusion: Check with the plan administrator.
Permalink Submitted by mk foss on Sat, 2010-07-17 03:37
When a SEP, SIMPLE or qualified plan is established the adoption agreement gives the employer choices in determining compensation for purposes of plan contributions. One of the choices is W-2 income which would include severance pay but not pretax medical.
Alan’s solution is the best. The plan with my prior employer specifically excluded severance pay from compensation for plan contribution purposes.