Sick day exchange to 401(k) plan
cmiller
1 Post
I recently read that the IRS has approved organizations to allow employees to exchange up to five unused sick days for a 401(k) contribution. Does anyone know the details of this concept?
Comments
"In this Private Letter Ruling, the IRS approved an arrangement that allowed employees to exchange up to five days of unused sick leave for an employer contribution to a "discretionary defined contribution plan with a salary deferral feature" (apparently a 401(k) plan). The IRS concluded that (1) the arrangement did not result in actual or constructive receipt of income to employees who were eligible to participate; (2) the plan contribution did not constitute a salary deferral contribution under a cash or deferred arrangement; and (3) the contribution was not "wages" for purposes of FICA withholding.
The employer at issue had both union and non-union employees. Pursuant to a collective bargaining agreement, the union employees generally earned 12 days of sick leave each year. Unused sick leave days could be carried over to following years, up to a maximum of 90 unused sick leave days. A provision of the collective bargaining agreement also stated that the defined contribution plan would provide for a mechanism whereby sick leave days could be exchanged for an employer contribution to the plan. The "Sick Leave Exchange" program proposed by the employer in this ruling would allow employees who had accumulated 30 days of sick leave to contribute up to five days of unused sick leave to the plan, with the employer making a contribution to the plan at the rate of 20% of the employee's regular gross pay for the number of days contributed. The employee would be fully vested in such contributions at all times.
The IRS concluded that the arrangement did not run afoul of the constructive receipt rules of Code Section 451. (Under these rules, an amount is included in a taxpayer's gross income in the taxable year in which it is actually or constructively received. Income generally is constructively received when it is made available to the employee, but not if the employee's ability to control its receipt is subject to substantial limitations or restrictions.) Specifically, the IRS ruled that a "contribution to an employee's account under [the plan] as a result of the Sick Leave Exchange program" was not income to the taxpayer for income tax purposes because the Sick Leave Exchange program did not give the employee the right to receive payment for unused sick leave. And because there was no option to receive cash or other taxable benefits in lieu of the days contributed to the plan, the resulting plan contribution was not a choice between current compensation and a plan contribution. Therefore, the contribution did not constitute an employee elective deferral under a qualified cash or deferred arrangement; instead, it was properly characterized as a non-elective employer contribution. Finally, the IRS ruled that contributions to the plan as a result of the Sick Leave Exchange program would not be wages for purposes of FICA withholding. Again, the IRS relied on its conclusion that plan contributions flowing from the Sick Leave Exchange program were non-elective employer contributions, as opposed to contributions under a qualified cash or deferred arrangement. (While elective contributions to a defined contribution plan are subject to FICA withholding, other types of employer contributions to such plans are not.)"
Hope this helps.