On September 5, 2009, the IRS issued Revenue Ruling 2009-31 and Revenue Ruling 2009-32 which hold, generally, that an employee’s unused paid time off may be contributed, on the employee’s behalf, to a qualified retirement plan. In both Rulings, the paid time off was available under a bona fide sick and vacation leave plan, which is not subject to Internal Revenue Code (“IRC”) Section 409A, and under which an employee may take paid leave without regard to whether the leave is due to illness or incapacity.
More specifically, after examining certain fact patterns, the Rulings concluded that an amendment made to a qualified profit sharing plan, which requires or permits certain contributions of the dollar equivalent of an employee’s unused paid time off to be made to the plan on the employee’s behalf (whether the employee is active or terminated), does not cause the plan to fail to meet the qualification requirements of IRC Section 401(a). However, these contributions must satisfy the applicable requirements of IRC Sections 401(a)(4) and 415(c). Also, if the amendment allows the employee to elect to have the contributions representing unused paid time off made to the plan, the election must be made under a qualified cash or deferred arrangement contained in the plan, and the contributions cannot exceed the limits of IRC Sections 401(k) and 401(a)(30).
The Rulings added that, assuming that the foregoing IRC requirements and limits are satisfied, the employee does not include the amounts contributed to the plan in gross income, until the amounts are distributed from the plan to the employee. Further, the employee does not include in gross income any amounts representing his or her unused paid time off that is not contributed to the plan, unless and until those amounts are paid to the employee by the employer.