NAGDCA Offers Opinion on Sick, Vacation Pay Contributions

“There is no explicit statute, regulation, or practice that expressly forbids contribution of accrued sick or vacation pay to a defined contribution plan,” is the conclusion drawn by NAGDCA’s Legislative Committee, which worked in tandem with the Internal Revenue Service (IRS) .The announcement by NAGDCA follows up on the final regulations issued on those programs last summer by the IRS (See Government Works! ).

Those final regulations came after some tweaking in response to comments during the review process of the 457 guidance, according to NAGDCA. In effect, the final liberalized the requirement under a special rule that allowed such an election for those type deferrals after the beginning of a month in which they were retiring or having a severance from service, if it would have otherwise been payable before the employee has a severance from employment and the election is made before the date on which the vacation pay would otherwise have been payable.

Yet plan sponsors still had questions.

Before NAGDCA’s Legislative Committee issued their opinion, Assistant Attorney General for the State of Maryland and past NAGDCA President John Barry told PLANSPONSOR.com that, in his opinion, the regulations clearly allow for the deferral of pay; however, most of the commentary coming out of the IRS would suggest that deferral can only take place under very limited circumstances, if at all. Barry said the way the regulations are currently written, payment of sick/vacation time can come to an employee only after they are gone, if they elected the deferral. However, the real problem, according to Barry, was that no particular rules are ever cited by the IRS as to when these practices are applicable and when they are not – and at that point he said that he is working with the legislative committee to remedy this situations (See Vacation, Sick Pay Deferrals Sticking Point for 457 Plans ).

State and local government deferred compensation plans, or Section 457 plans, are tax-deferred plans available to state and local public employees. These plans are voluntary, supplemental, long-term retirement programs that give employees of states, counties, cities, towns, and special-purpose local governments an opportunity to defer receipt of income until retirement or termination of employment.

A copy of the opinion on sick and vacation time accrual can be found at http://www.nagdca.org/resource/nagdca_notes/notes02-04.pdf.