Unused Vacation? It May Pay

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Taking vacation pays dividends -- especially if your company allows you to put unused vacation or sick-leave days into your 401(k) or profit-sharing plan.

To encourage savings, the Obama administration recently blessed such transfers. While companies may have to amend their benefit plans to allow it, the administration hopes firms will do so. "We tried to build in as much flexibility as possible to make it attractive," says Mark Iwry, a senior Treasury official.

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.

While firms that choose to pay for unused leave must offer it as an option to all plan participants, they don't have to offer it every year. They also can prorate or limit the amount of leave they are willing pay for.

Will payments for unused leave get an employer match? Unclear. The answer depends in part on how a firm's plan is written, says Cara Welch of World at Work, an association of human-resources professionals. What is clear is that the plan must remain nondiscriminatory.

Write to Laura Saunders at laura.saunders@wsj.com