IRS Treats More Severance Pay As Section 415 Comp

Originally, the IRS was going to include up to 2.5 months of post-severance compensation in Section 415 compensation.

“Some commentators requested a lengthening of the 2.5-month period to as long as a year, or exceptions from the 2.5-month rule under certain circumstances (such as teacher pay that is paid on a 12-month basis for each 9-month school year, or residual payments that are made to entertainment industry employees years after the services are performed),” officials write in a preamble to the new final rule, which appears today in the Federal Register.

In the end, officials decided to set the usual cut-off for including severance pay in Section 415 compensation at 2.5 months, but they decided that taxpayers also can include compensation paid by “the end of the limitation year that includes the date of severance from employment.”

Post-severance payments of accrued sick, vacation and other leave that are paid either within 2.5 months or “by the end of the limitation year” will not show up in Section 415 compensation totals unless the plan specifically includes such payments, officials write.

The limits on inclusion of severance pay from Section 415 compensation do not normally include payments made to employees who are serving in the military, officials write.

The final rule expands on the “proposed regulations by adding another exception to the post-severance timing rule for compensation paid to a permanently and totally disabled participant, provided certain conditions are satisfied,” officials write.

A copy of the final regulations is on the Web .