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IRS says yes to contributing unused sick leave to 401(k)

     A private letter ruling by the IRS has approved letting 401(k) participants exchange unused sick days for contributions to the plan. PLR 200247050 came about as the result of a company that granted 12 sick days a year to its union and non-union employees, but only allowed them to accumulate a maximum of 90 days. Both the union and the employer wanted to let the employees contribute unused sick days to the 401(k) plan as a means of rewarding those who did not use their sick days. They agreed in the new contract that an employee with 30 or more days of unused sick leave could contribute up to five sick days at the rate of 20% of the employee’s gross pay. The contributions to the plan would be made on a pre-tax basis and would be subject to the limits and non- discrimination rules of the IRS code. The contributions would also be fully vested at all times.

     The IRS reviewed the arrangement and found it permissible, saying that sick leave contributions are a non-elective contribution by the employer, rather than a 401(k) contribution by the participant. The IRS reasoned that because an employee does not have the right to receive a cash payment for their unused sick days, the sick leave exchange program is not a cash or a deferred arrangement. The IRS also determined that the contribution is not subject to FICA tax because the contribution does not result in actual or constructive receipt of income by the employee.

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