On September 8, 2009, in response to President Obama's and Treasury Secretary Geithner's remarks about Americans' need to increase retirement savings, the Internal Revenue Service issued two revenue rulings that would permit the value of accrued sick, vacation, and other paid leave to be contributed to an employer’s qualified retirement plan. Through such contributions, employees can defer federal income tax on the value of the accrued leave, and employers can provide a potentially valuable retirement benefit.

The revenue rulings contemplate two different leave contribution arrangements—one for "annual" accrued leave plans, where the value of accrued leave at the end of each year would be contributed to the qualified retirement plan, and one for accrued leave plans with "carryover" provisions, where the value of accrued leave accumulated throughout an employee's career would be contributed to the qualified retirement plan following termination of employment. Employers could structure the contribution arrangements so that the accrued leave is contributed to the qualified retirement plan as either an employee's pretax elective deferral or as an employer nonelective contribution. In either case, the contributions must meet a series of technical requirements, including the qualified retirement plan nondiscrimination tests.

Although the IRS guidance confirms the legitimacy of certain basic leave contribution arrangements that sophisticated employers have had in place for some time, several significant issues are left unaddressed, including the following:

  • Would leave contributions be subject to FICA taxes? Although the guidance is silent on this issue, employer nonelective contributions generally are exempt from FICA taxes, and the guidance confirms that leave contributions may be structured in this form.

  • Can leave contributions be made to a section 403(b) tax-sheltered annuity plan or a government-sponsored 457(b) deferred compensation plan? The guidance addresses only contributions to section 401(a) qualified retirement plans, but it seems that the rationale could be extended to these similar arrangements. Church and governmental employers exempt from (or that can more easily satisfy) nondiscrimination requirements may be particularly interested in implementing leave contribution arrangements.

Contact Information

If you have questions about any of the topics covered in this alert, please feel free to contact Brian M. Pinheiro, 215.864.8511 or pinheiro@ballardspahr.com, or any other member of Ballard Spahr's Employee Benefits and Executive Compensation Group.

Copyright © 2009 by Ballard Spahr LLP.

(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.