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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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I have been offered a voluntary Separation program payout of

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I have been offered a voluntary Separation program payout of one year's salary to be paid in a lump sum amount. My employer is not considering this as earnings for retirement plan contributions just for taxation. Can I shelter some of the payout in a 403(b) or 457 plan?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

Hi and welcome to Just Answer!
You probably may not shelter the full amount - but certainly may contribute part of the salary into retirement plans - up to the limit.

The total limitation on deferrals for 403(b) and 457 plans is $16,500 fro 2011 and $17,000.for 2012.

If you already made contributions - these contributions should be considered.

If you are 50+ and if your plan allows - you may be able to make additional contributions. See here details for different plans -
Please be aware that there is a total limit for all contributions - your defered contribution and your employer's contributions - $49,000 in 2011 and $50,000 in 2012.

Let me know if you need any help.


Customer: replied 5 years ago.

I already knew all of this information. I'm sorry if my question was not clear. My fiancial advisor said taht it is the timing of the lumpsum payout that prevents me from being able to shelter it. It will be paid the first of the month following my last day on the job.

Why would this make a difference?

Expert:  Lev replied 5 years ago.

As long as you are paid wages - these wages are paid for services you provided - and are eligible for deferrals.

You may not defer wages after they already received - but if you are paid several days after your separation - that should not prevent you from making contributions UNLESS your plan specifically set some additional restrictions.

You may request and review plan documents to verify - but ther e is nothing in the law that prevents you from eligibility based on timing.

Customer: replied 5 years ago.
Just one more clarification...lumpsum payouts from a voluntary separation program are considered wages? even if they are paid after my termination date?
Expert:  Lev replied 5 years ago.
Yes - that payment is considered part of your wages and is subject of FICA taxes even if paid after the termination date.
See for reference - page 11 -
Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and federal unemployment taxes and income tax withholding. Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes.
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