Which of the following statements about post-severance compensation is true?

The statement that post-severance compensation is optional for plan documents to specify its inclusion is accurate. This means that plan sponsors have the discretion to decide whether to include post-severance compensation (such as severance pay, bonuses, or other types of compensation received after an employee has ended their service) when determining the compensation used for various plan calculations, including contributions and benefit accruals.

Including post-severance compensation in a 401(k) plan can have implications for contribution limits, benefit calculations, and overall plan compliance with regulations governing qualified plans. Since regulations and plan designs can vary, plan documents may specifically outline whether post-severance compensation will be part of the plan’s definition of compensation.

Understanding this flexibility is important for plan administrators as it helps ensure that the plan aligns with both regulatory requirements and the organizational policies of the employer.