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Are Distributions Allowed to Rehired Employee?

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I have a new client that is a governmental entity that sponsors a 457(b) plan for its employees.  An employee has attained normal retirement age under the plan and retired.  He did not take a distribution at retirement.  Four months later, the individual is re-employed in a part-time position which makes him ineligible for contributing to the 457(b) plan.  The employee has now asked for a distribution from the 457(b) plan. 

 

The plan provides that upon severance from employment with the entity, a participant shall be entitled to receive a distribution of his account.  Severance from employment is defined as a voluntary or involuntary termination of employment. 

 

The regulations under 457 provide that an employee has a severance from employment with the eligible employer if the employee dies, retires, or otherwise has a severance from employment with the eligible employer, and directs one to see the 401(k) regulations for additional guidance concerning severance from employment. 

 

Because of the individual’s status as a rehired employee, and the reference to the 401(k) regulations, I am concluding that his rehired status makes him ineligible for a distribution now.  I am being told that in the past the client has taken the position that a “retirement” is sufficient to allow for subsequent distributions, even while the individual is working for the entity as a part-time employee.  I can’t find any guidance on 457 plans that would allow for a distribution based on the prior retirement when the individual is currently working for the entity, and I am wondering if the group knows of any unofficial IRS guidance on this issue.   

 

 

 

 

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I believe IRS guidance is strictly facts and circumstances, but i also think they are quite clear there must be a true separation from service. In this case that may have happened at the time of retirement but clearly the employment relationship is no longer severed. If the governmental 457 rules will allow, I would suggest amending the plan for post-NRA in-service distributions, then this becomes moot. I see clients and their employees all the time having someone "retire" so they can get their pension but it's really just a disguised reduction in hours, and IRS is clear that is not a severance. If IRS came out with workable phased retirement rules, this wouldn't be an issue. In your case, I think the client's position and the IRS's position are different. Good luck.

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A rehiree is not a retiree.  The rehiree is eligible for distributions to the extent the plan allows in service distributions.

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Thanks CuseFan and Pension Pro.   The issue here is that the 457 rules limit in-service distributions to small accounts (less than $5,000) where the employee has not made contributions for the last 2 years, and to accounts of individuals who have attained age 70 1/2.   Neither of these rules apply to the rehired part-time employee. 

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Exactly.  I think he's stuck until age 70½ or he re-retires.  I suppose he could get creative and borrow half....

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