“A few employees terminated employment at the end of the year, and their last day of work was December 30, 2016, which was the last business day of the year for our firm (December 31 was a Saturday last year, and our office is closed on Saturdays). Our 403(b) retirement plan has a last-day rule, where the document language is quite clear; you must be employed on the last day of the plan year (our plan year is calendar) in order to receive our annual employer contribution. However, the employees in question would most certainly have been at work had December 31 been a business day; the only reason we terminated them on the 30th is that they could not have worked for us on the 31st, as the office was closed. The plan document does NOT address the specific issue of what happens when the office is closed for business on the last day of the year. Any thoughts from the Experts as to whether or not an employer contribution for the 2016 plan year should be provided? Our 403(b) plan is subject to the Employee Retirement Income Security Act (ERISA) if that is relevant.”
Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
Interesting question! Unfortunately, there is no specific formal guidance on this issues, and even informal Internal Revenue Service (IRS) guidance on this issue is somewhat dated. Based on the comments by the IRS representative back at the 2005 ASPPA Conference, the answer depends on the employer’s determination of when the employment relationship has ended. In question 42 in the Compilation of Questions to IRS/Treasury from the 2004 Enrolled Actuaries Meeting, the IRS agreed that a participant’s day of “retirement” is his last day worked, but that “last day worked” is a facts and circumstances determination “based on the employer’s practice concerning the last day an individual is considered an employee.” With regard to 403(b) plans specifically, the regulations regarding when an account is distributable take the same approach. Under Treasury Regulation Section 1.403(b)-6(h), an account is distributable upon a severance from employment which is defined as occurring “on any date on which an employee ceases to be an employee of an eligible employer.” Again, it is up to the employer to determine that date.
An employer may use a bright line test that the last day of the plan year means the last day of the plan year even if the last day falls on a holiday or weekend. This is the simplest approach for the employer but least favorable to participants. Under this approach, in both the question above regarding employees terminating employment “at the end of the year” and the example below of the employee who quits on Friday, December 30, the employer could conclude that none of the participants were employees on December 31 and exclude them from an employer contribution allocation for the plan year.
Any approach other than the bright line test involves the interpretation of facts and circumstances to determine whether the individual would have worked on the last day of the plan year had that day fallen on a business day. Under this approach, an employer could conclude that individuals intending to terminate employment “at the end of the year” whose last day of work is December 30 would have worked on December 31 had it been a business day and treat them as employed on the last day of the plan year. At the same time, the employer could still conclude that the individual who quit on December 30 would not have worked on December 31 had it been a work day and not include him in the employer contribution allocation.
Whichever approach an employer decides to take, consistency is key because each decision sets a precedent .And, of course, it would be prudent to consult with counsel with specific experience with your retirement plan regarding such issues.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.