Does Severance = Wages?

[Wiles]

I have a client that is being laid off and will receive a severance payment in 2014. The client asked HR if they could make a 401(k) contribution salary deferral with their severance. HR said no, because severance is not considered wages. Is that right?

I asked client to ask HR, since severance is not wages, then it would not be subject to FICA. HR replied and said that it would be subject to FICA. Am I mixing apples & road apples here? Or can HR only be correct on one of these?

[MDEA]

Severance

It is wages but HR can decide not to take 401k payment from it.In MD you can not receive unemployment while collecting severance pay.

[ChEAr$]

I think it's the IRC which dictates that 401k contributions be only from actively earned wages and not determined by any company's personnel department.

[Roberts]

Severance pay is considered POST employment income. As you are no longer employed by the company, you are no longer allowed to further contribute to the 401(k).

[New York Enrolled Agent]

I have a client that is being laid off and will receive a severance payment in 2014. The client asked HR if they could make a 401(k) contribution salary deferral with their severance. HR said no, because severance is not considered wages. Is that right?

I asked client to ask HR, since severance is not wages, then it would not be subject to FICA. HR replied and said that it would be subject to FICA. Am I mixing apples & road apples here? Or can HR only be correct on one of these?

I think you might need to forget the word "wages" and substitute the word "compensation". The reason I say that is the regulations use compensation.

It may seem unfair but Reg. §1.61-2 says compensation includes severance pay. However, Reg. §1.415(c)-2 has a more restricted view of severance pay as compensation. You need to read the regulation to see the nuances why severance pay may or may not constitute compensation under §415(c) which governs the limitation on putting money into a defined contribution plan. The phrase severance pay can be used in different contexts as the regs suggest.