Clients receiving severance

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May 18, 2010 4:22 pm

I have a client that recently was laid off from their job after 25 years, they are receiving a severance package until Feb. next year. They want to do a rollover of their 401k into an IRA. Been asking around and getting many different responses, some people say it can be done now, some say they are still considered employed until the severance is up. All 401k contributions have stopped. Do they have the right to do an IRA rollover before their severance is up?

Thanks

May 18, 2010 4:55 pm

You can do the rollover as soon as they are off the payroll. Severence is a different issue. Once they are seperated they can do the rollover.

May 18, 2010 4:59 pm

Well, they are separated from employment but they are still on the payroll getting severance payments.

May 19, 2010 9:21 am

IRS Notice 2009-27 defines an "involuntary termination" as "a severance
from employment due to the independent exercise of the unilateral
authority of the employer to terminate the employment, other than due to
the employee's implicit or explicit request, where the employee was
willing and able to continue performing services" based on all the facts
and circumstances.

It seems to me that if your guy is not still working, he's terminated, even if he is getting a periodic severance check as opposed to a lump sum.

Have him contact HR and request a termination form or contact the Plan's recordkeeper to get the rollover ball rolling.

May 19, 2010 1:20 pm

The client can roll over his 401k even if he is getting severence and benefits, as long as he has been officially terminated. Severence is generally a lump sum and is not an issue. Just make sure he has a letter indicating his termination, with a date.

Jul 20, 2010 10:46 pm

[quote=pjane007]

I have a client that recently was laid off from their job after 25 years, they are receiving a severance package until Feb. next year. They want to do a rollover of their 401k into an IRA. Been asking around and getting many different responses, some people say it can be done now, some say they are still considered employed until the severance is up. All 401k contributions have stopped. Do they have the right to do an IRA rollover before their severance is up?

Thanks

[/quote] Working in the 401k division of Merrill and Vanguard I got this question a lot... It is a VERY RARE instance that an employer will change your status to terminated (severed EX employee) while still handing out the severance. In fact it makes sense not to alow it, if it was a large layoff.  The 401k plans often get lower fees and better treatment based on the size of the plan. Many a day I had people call in screeching about why hasn't their status been changed yet. Just because you don't have to show up DOESN'T mean the employer has to let you go anytime soon. Some of you severence folks still serve a purpose to them. Some empoyers only change statuses once a quarter to save money on admin costs, so you can bet they aren't likely to change it while you are still getting money from them...