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Salary Continuation after retirement

We have an executive that is retiring - his exit agreement allows for salary continuation into next year. The agreement states we will withhold taxes from the continuation payments - HR is saying we cannot pay him through payroll (W2) as it will screw up his retirement benefits - 401K etc - and we have to pay him through AP as 1099.
Can you verify this is correct for this situation - and if we pay through AP - do we withhold at the same rate as when he was an employee?
Thank you.


  • rrupertrrupert ✭✭✭

    1099 will not withhold correctly for FICA etc

    HR is wrong on this one...I would press back on how this will "screw up" his retirement benefits. However it might mess up his SS benefits (not my wheelhouse, but is there still a max you can earn that then limits SS benefits)?

    Your payroll/HR system should be able to have a status of Retired while still paying wages. Ask them to show you in the plan document for the 401k where this is not available. Yes, he might get match, PS, etc but these would be considered wages -- possibly severance though that may be excluded.

  • David WarrenDavid Warren ✭✭✭✭

    If you issue a 1099 you are saying that the payments are unrelated to the worker EVER being an employee. Give your 401(k) trustee a call. There is a chance that the 401(k) distribution needs to be delayed. There is no chance that pretending these payments are not wages is correct. IRS is very clear on this even if you are not. This is legally severance pay, which is legally WAGES. The only real issue is if the employee is still on the payroll drawing WAGES that they can also pretend that they are no longer on the payroll and draw a 401(k) distribution as well. If you are going to go through with this, get someone very senior to sign off on it, so you are not person who gets blamed by IRS when the stuff hits the fan.

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