I'm trying to find a cite that addresses deferrals from severance. I'm not sure if deferrals are allowed from severance pay received after the employees termination, since the participant is no longer actively employed. Any help would be appreciated. Thank you.

Today, I just discussed this issue with "my" ERISA attorney.

We agree that no cite exists to preclude withholding from severance. We also agree that if a participant is not providing services to the employer during the period of serverance, no withholding or other contributions should be made to that participant.

You may wish to get another opinion.

A literal reading of the regulations leads one to the conclusion that only active employees can make 401(k) contributions.

First, a CODA is defined to apply only to "eligible employees." 1.401(k)-1(a)(2). Second, "eligible employee" is defined as an "employee" who makes a cash-or-deferred election. 1.401(k)-1(g)(4). Third, an "employee" is defined by cross reference to the 410(B) regs. 1.401(k)-1(g)(5). Finally, and most importantly, the 410(B) regs define "employee" as an individual who "PERFORMS SERVICES" for the employer. 1.410(B)-9. Thus, this seems to contemplate that only actively employed individuals may make 401(k) deferrals. For what it is worth, the IRS has touted this view (without analysis) on the rubber chicken circuit.

That said, the regs could be a bit clearer on the point and you may want to take your chances on a fully disclosed determination letter request . . .

There is a good, concise discussion of this issue in the June 1998 Tax Management Compensation Planning Journal by Bernard O'Hare. He summarizes issues about the relationship of severance pay to plan compensation and also discusses service credits for the period an individual receives severance.