Supporting Financial Futures: Post-Termination 403(b) Contributions
Employers have a unique opportunity to demonstrate care and commitment to their employees' long-term financial well-being — even after employment ends — through post-termination 403(b) contributions. While this practice may not be common, it offers significant benefits for both the employer and the former employee. The IRS allows post-employment contributions, but there are specific rules to follow.
The Basics of Post-Termination Contributions
Employers can make contributions to an employee’s 403(b) account for up to five years following their termination, provided the contributions are based on compensation earned in the last year of employment before their termination. This compensation does not include amounts contributed by the employer to the employee’s 403(b) account. Compensation for an employee working less than full-time should include a time period that would constitute a year of service.
These contributions must meet IRS requirements for deferred compensation to qualify. Also, they cannot exceed the annual 403(b) contribution limits for the year in which they are made. This includes both employee and employer contributions, even if the employee is no longer actively working.
Why Consider Post-Termination Contributions?
Continuing contributions can be a helpful part of a severance package, allowing you to support employees in their transition while enhancing their retirement savings. It can also help your organization maintain a positive reputation by showing employees that you value their long-term financial wellbeing.
Key Considerations for Employers
Timely Payments: Ensure contributions are processed within the same tax year or by the next year’s first quarter, depending on the nature of the deferred compensation.
Documentation: Clearly outline any post-termination contribution arrangements in the employee’s termination agreement or severance plan.
Consult Experts: Rules surrounding retirement plans can be complex. Work with your payroll provider, plan administrator, or legal counsel to ensure compliance.
Post-employment contributions can be a win-win if handled properly. They allow employees to maximize their retirement benefits while giving employers an opportunity to leave a lasting positive impact for both the former staff member and the organization’s brand. Keep the rules in mind, and everyone benefits.
Talk to your Auxilio Partner Strategist about how to set up post-termination contributions. If you’re not yet an Auxilio client partner, contact us to learn how we can serve your church or faith-based nonprofit by reducing your administrative burden to free you up for ministry.