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Termination of PTO Plan

We are considering terminating our current PTO plan as of January 1, 2013 and changing the layout of the plan. We would like to give employees the option of rolling over their remaining PTO as of December 31, 2012 into an HSA or 401k plan. Where can I find information on if this is acceptable and how we would go about doing so?

You are allowed to have the employee contribute PTO dollars to a Health Saving Account provided that your PTO plan allows for cash out for unused vacation days at the end of the year. However, if your current PTO plan only allows for accruals and roll-over time then you cannot grant a cash-out to be rolled over to a Health Saving Account. Also in order for an employee to use this option they need to be enrolled in a high deductible medical plan ($1,000 or greater).

The same rules apply for rollovers into a 401(k) plan. Provided that your PTO plan allows your employees to cash out their time, they can defer the cash payout into their 401(k) plan; it is considered a 401(k) elective contribution. The PTO credits contributed by the employee would be considered elective and subject to maximum 401(k) limits. The contributions would also be considered as compensation to the employee and reflected on the W-2 for the year contributed. Unless the plan is a safe harbor plan, amounts contributed are included in the plan’s annual ADP testing and since highly compensated employees are more than likely going to defer unused PTO credits, this may negatively impact your ADP testing. The employee would be 100% vested in this type of contribution. You will also need to amend your plan document to allow for contributions of unused PTO amounts.

Before you consider doing either or both avenues of PTO cash out you should consult your attorney.

Plans and policies will need to be revised and amended and IRS rules and regulations would need to be followed.

This entry was posted on Saturday, September 15th, 2012 at 5:59 am and is filed under
Human Resources Management.
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