We have a guy in who left employment but was deferring on severance pay after he left. I told them that it was a gray area and technically they're not supposed to defer on severance, but it thay allowed it, they had to give him the SH on that pay, too. They opted not to and to return the deferrals. can they do that and would you return earnings, too. ?

the general advice from the IRS in the past is that severance pay is not to be deferred on. therefore the $ should have been returned (along with gains losses)
you are correct when you say it is a gray area - some of the severance could have been due unused vacation pay or something similar. since if you were active you could have deferred on vacation pay, then it would seem there is some types of severance pay it would be possible to defer on, but at this time there are no clear guidelines.

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