Unused Vacation may soon be banked in retirement savings

The Obama administration recently approved transfers of unused vacation pay to retirement savings. Read more in a Wall Street Journal article .

"The techniques are available for use with all qualified plans, which include 401(k), Keogh and profit-sharing plans but not individual retirement accounts or SEP-IRAs. While the rules don't currently extend to the 403(b) plans used by nonprofit organizations, the Treasury is willing to consider expanding them to include such plans, Mr. Iwry says.

The rules apply to "cash-outs" of unused vacation, sick leave or personal days that occur either annually or when an employee leaves a job. If an employer pays for such leave either in whole or in part, the worker could contribute the entire payment to the company's plan, unless he or she has already maxed out the annual contribution limit. This year the limit for most workers is $16,500, or $22,000 for those over 50.

Employers that don't currently pay workers for unused leave may want to reconsider their policies. The transfers compensate workers and encourage savings but don't increase base pay.

Companies can opt to pay workers for unused leave only if they bank the money in a 401(k) or other qualified plan -- in effect requiring employees to save or else forgo the money. A firm also may let employees decide whether to save or spend."