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particular interest to 403(b) and 457 programs. This section confirms that salary deferral contributions may be made from certain types of severance pay, as long as the pay is received within 2-1/2 months after severance from employment. Employers, particularly public school districts, may need to reexamine their policies on the payout of accrued sick and vacation. Let’s look at the details.

             What types of post-employment salary reductions are permitted? Only payments that would have been available if the employee had not terminated. This includes unused sick and vacation pay as long as the employee could have used the accruals if she or he had not terminated. Bonuses not related to the termination, such as bonuses for good performance, are also included. Specifically excluded are retirement incentive bonuses.

             Therefore, in order that your former employees may continue to shelter some or all of their accrued sick or vacation pay, you should ensure such pay is made available no later than two and a half months (2-1/2 months) after the date they sever employment. Although these are proposed regulations, the rules on severance pay can be relied upon effective January, 2005.

Two important clarifications on 403(b)s have recently become available. One is clearly good news, concerning new rules on bankruptcy protection for 403(b) accounts. The other affects the ability of employees to accumulate sick and vacation pay into their 403(b) accounts.

Bankruptcy Protection          

While ERISA 403(b) accounts have enjoyed protection from creditors in event of personal bankruptcy, non-ERISA accounts – typically salary deferral only programs or governmental 403(b)s, and some Church plans – have been subject to state law. Effective October 17, 2005 the new bankruptcy bill will protect the following types of accounts: 401(a), 401(K), 403(B), 457, IRAs (Subject to a $1m cap on contributions), SEPs, SIMPLEs, and Section 529 plans and Coverdell IRAs. Contributions made within 365 days of the bankruptcy proceeding are excluded from protection.

Termination Pay Clarification

             In May, the IRS issued regulations on the section of the tax code that limits contributions and benefits in qualified plans – known as IRC Section  415. The majority of the regulations affect Defined Benefit plans but there is one section of