IRS ALLOWS DEPOSITING UNUSED VACATION AND SICK LEAVE TO 401(k)s

John GarnerDMEC News

In his weekly radio address on September 5, 2009, the President proposed a number of new initiatives to help families save for retirement.  One of them is to allow unused leave to be converted to 401(k) savings.  Accordingly, the IRS released Revenue Rulings 2009-31 and 2009-32 to clarify steps that employers can take immediately to contribute unused vacation and sick leave to 401(k) accounts.  These rulings describe how employers can permit employees to convert the value of their unused leave into additional contributions to tax-qualified Section 401(k), profit sharing or stock bonus plans.

Revenue Ruling 2009-31 has to do with amounts of leave that would be forfeited at year-end.  Revenue Ruling 2009-32 has to do with unused leave at the time of termination.

Employers are not required to make any changes, but the rulings give examples of the kinds of changes employers could make to their plans, if they choose to do so.

The rulings say that because the amounts contributed will vary based on the amount of the participant’s unused paid time off, the contributions are likely to preclude a plan from satisfying a design-based safe harbor.  Therefore, testing based on the contributions made for individual participants generally will be required.  Furthermore, contributions made pursuant to these arrangements must not exceed the Section 415 limits.

The rulings can be found at:

http://www.irs.gov/pub/irs-drop/rr-09-31.pdf

and

http://www.irs.gov/pub/irs-drop/rr-09-32.pdf

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