That’s Larry Brown, recently fired head coach of the New York Knicks, possibly thinking ahead after the just revealed $18.5 million settlement of his employment contact.

Revealed because under the terms of the settlement arbitrated by NBA Commission David Stern there was a non-disclosure clause. Instead, the media was scooped by the Cablevision (owner of the Knicks) Form 10Q filed with the SEC on November 8, 2006.

Coincidentally, Commissioner Stern’s decision about Coach Brown’s severance pay comes at a time when our retirement plan clients are going through a year end amendment process. The process includes that part of the IRS proposed Section 415 regulations that provide plan sponsors the first formal guidance on an employee’s deferral of severance pay.

It’s sometimes difficult to explain – and for clients to understand – technical and arcane “pension-speak” so being able to point to a “for example” helps.

The new guidance says that employees are eligible to contribute post severance compensation to their 401(k), 403(b) or 457 accounts under certain conditions. Post severance payments include sick, vacation and other leave as well as regular pay, commissions, overtime, shift differential pay, and bonuses.

 In order for an employee to defer post severance compensation, the regulations require that:

  • The post severance deferral must represent pay that employees would have received, or leave that could have been taken, if they had continued to work.
  • The agreement to defer must be initiated prior to the month this compensation would otherwise be paid or made available.
  • Post severance pay deferrals must be made within 2½ months after termination of employment or retirement.
  • The total amount deferred for the calendar year (normal payroll deferrals plus post severance deferral) cannot exceed the annual maximum limit that is in effect for the calendar year the deferral is made into the plan.
  • FICA tax, if applicable, must be deducted from these amounts before deferring into the plan.

The proposed regulations also include an exception for military continuation or differential pay.

Plan sponsors considering whether to permit such deferrals should also consider whether their payroll systems need to be modified to distinguish between pre- and post-severance compensation.

NBA fans may enjoy reading Henry Abbott’s TrueHoop blog. Henry, like me, is also coached by Kevin O’Keefe and his lexBlog assistant coaches.