Last Day of the Plan Year
Rev. 12/01/05, E-mail Alert 2005-24

As far as we know as of December 15, 2008, this is unchanged.

When December 31st falls on a Saturday, as it did in 2005, is December 30th treated as the last day of the plan year? Generally, yes according to the Internal Revenue Service (IRS). This issue was addressed at the 2005 ASPPA National Conference.

Employment is a “relationship”
The IRS gave us guidance starting with this rule of thumb:
Being "employed" on the last day of the year is not necessarily the same as "working" on the last day of the year. The IRS indicated that employment is a “relationship” with the employer. For example, if you are on vacation, you are still employed by the firm, even if you may not be actually working there during the vacation time period.

Last day of plan year falls on a weekend or Holiday.
If the last day of a plan year falls on a Saturday or Sunday, and the employee has the status of an employee on the last business day of the plan year, then the employee is considered employed on the last day of the plan year.

For example, December 31, 2005 is a Saturday. The retirement plan requires a participant to be employed on the last day of the plan year to receive an allocation of employer contributions. If the company's usual business operations period is from Monday to Friday only, and the employee’s last day of work in 2005 was Friday, December 30, the employee is deemed to have satisfied the requirement of employment on the last day of the plan year. The same result would occur for any other allocation entitlement with a last-day requirement, such as the top-heavy contribution. However, if someone were actually terminated from employment on December 30, the employment relationship had ceased before the last day of the year and there would be no entitlement to an allocation.
Caveat: A termination of a large group of employees at year end might trigger a possible partial termination or cause a plan to fail coverage testing, thus requiring the sponsor to increase vesting or provide allocations to the affected group.

This rule also applies to off-calendar year plans. For example, assume an off-calendar year plan has a last day of the plan year on September 30. September 30, 2006 falls on a Saturday. If an employee’s last day of employment is Friday, September 29, the employee is considered to have been employed on the last day of the plan year.

Another question arises: use of unused vacation time.
May an employee add unused vacation time to the termination date of employment if the unused vacation time would bring the individual’s employment beyond the last day of the plan year?

The IRS indicates that the unused vacation time may not be added to the employee’s termination date in order to reach the end of the plan year.

Example: an employee terminates employment on December 23, 2005, with entitlement to two weeks of unused vacation time. The last day of the plan year is December 31. The employee may not add the two weeks of unused vacation time to the December 23 termination date, and thus is not considered employed on the last day of the plan year.

Firm closes for a short period, which includes the end of the plan year.
A company sponsors a retirement plan with a December 31 year-end. If it closes for two weeks, i.e., December 23, 2005 to January 9, 2006, due to a regularly scheduled company-wide winter holiday; are employees who worked on December 23 considered employed on the December 31, last day of the plan year?
The IRS says, “YES,” because this is a company-wide vacation all individuals who did not actually terminate or resign before December 31 are considered employed. Seasonal employees were not addressed in the IRS discussion of this matter. (However, the standards of the particular industry may have a bearing on the answer to this question.)