Advanced Underwriting Consultants

Ask the Experts – May 22

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can severance pay be contributed toward a 403(b) tax-sheltered annuity?

Answer: Although a participant in a 403(b) plan contribute up to a $17,500 of her salary to the plan in 2014, the participant cannot contribute more to a 403(b) plan than she earns as compensation for the year. Whether severance pay constitutes “compensation” depends on when the participant receives it.

The general rule is that compensation does not include severance pay if it is paid after severance from employment. Treas. Reg. § 1.415(c)-2(e)(3)(iv). For example, if your client was fired early in 2014, but will receive 6 months of severance pay in 2014, then she cannot contribute to the 403(b) plan.

If the severance pay is actually payment for unused sick, vacation, or other leave, or if the payment is received as part of a nonqualified unfunded deferred compensation plan, then the payments are considered “compensation” and therefore may be deferred to the 403(b) plan.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.