Running a business is a daily learning experience. New questions and situations arise concerning employees and it’s up to you to find the right answer. The following situation, which occurred at one business, could easily occur at any business. Understanding what your company’s 401(k) plan allows, in advance of any employee questions or actions, assures you of being prepared to address any situation that arises regarding 401(k) contributions.
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The question involves an employee who resigned, and the company employing him paid out accrued vacation time along with his final wages. The employee had chosen to have 15% of his wages withheld for his 401(k) during his time of employment, and the company withheld that amount from the accrued vacation payout. The employee informed the company they were not allowed to deduct a 401(k) withholding from his vacation payout. The company needs to know if they were correct in their actions or if the employee’s statement is correct.
If the employee benefits in question were accrued prior to the employee’s separation date, and provided the company’s plan allows it, you may deduct a 401(k) contribution from the vacation payment. There are plans that clearly define only “current” employees as eligible to participate in the 401(k), and if a deduction were made from a resigned employee’s vacation payout it could be considered a violation of the plan. When a plan does not state there is a “current” employee limitation, it is permissible for the company to withhold a 401(k) contribution from the vacation payout.
It’s important to know there is no restriction against the employee changing the 401(k)-contribution amount to zero, prior to tendering his resignation. It may be in the best interest of the company to remind employees who are separating from the company that the final payment, including an accrued vacation payout, may include a withholding contribution to their 401(k) plan. Benefits provided to an employee only after separation, such as a severance package, may not include a contribution to a 401(k) plan.
Understanding your 401(k) plan, and what it allows, provides for a smooth transition when an employee resigns.