Recently, a client called about a remote employee who was moving from the company's primary location to a different state, and would continue working for the company. The company had no other employees in the new state and the client wanted to know if the employee's new state residence might affect the company's 401(k) retirement plan, which includes a generous company matching contribution. Generally, ERISA provides that 401(k) retirement plans are exempt from state and local laws; however, state-mandated benefits may have an indirect impact on a 401(k) retirement plan and other employer-provided benefits.
Required Payout of Accrued Paid Time Off
In accordance with the laws of its primary location, the company does not pay accrued paid time off (PTO) to an employee at termination. The new state requires that the company pay accrued PTO to an employee at termination. The client wanted to know if the payment of the terminated employee's accrued PTO is compensation for 401(k) deferral and matching purposes.
The Internal Revenue Code provides that 401(k) deferrals may not be taken from severance pay. In contrast, post-severance payments made for services rendered by the employee prior to termination or for PTO that the employee would have been able to use if employment continued may be eligible for 401(k) deferrals and matching contributions depending on the terms of the company's 401(k) plan. The client's plan document was recently restated using a well-known recordkeeper's adoption agreement and basic plan document. The basic plan document specifically provides that payout of unused PTO is compensation for 401(k) and matching purposes unless the client has checked the box in the adoption agreement that excludes unused leave compensation for deferrals and match. Other recordkeepers' documents take the opposite approach and automatically exclude the payout of accrued PTO from 401(k) deferrals and matching compensation. The different approaches by these recordkeepers reinforce the basic rule that one must first read the plan document before determining how items of compensation are to be treated.
State Law Requiring Reporting of Medical Coverage
In addition to requiring payout of accrued PTO at termination, the new state, like a number of others, requires its residents to obtain health care coverage or pay a penalty. The following jurisdictions require employers with self-insured medical plans to report information to the applicable state about employee health care coverage: California, Massachusetts, New Jersey, Rhode Island, and the District of Columbia. While Vermont requires its residents to maintain minimum essential coverage, it does not require a company to file a report with the state.
Other State and Local Law Considerations
There are a myriad of other state and local laws that a company must consider when it allows an employee to transfer to a state in which the company has not previously had a presence. For example, states have enacted (1) corporate laws requiring entities doing business in that state to register with the Secretary of State, (2) employment laws requiring mandatory leave, (3) state disability insurance programs, (4) state and local income tax withholding rules, (5) state unemployment insurance benefits, (6) state workers' compensation coverage, and (7) state-mandated retirement benefits.
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