Distribution to Terminated Participant who is subsequently rehired, what about the ps receivable?

[Guest mmc]

A terminated participant in a participant directed account plan was paid his 401(k) balance and profit sharing balance (minus the receivable). The participant was subsequently rehired prior to the profit sharing contribution being funded. He still has the 2003 profit sharing allocation in his account. Is the rehired participant entitled to a distribution of the the receivable that was funded after his rehire?

[Guest Bob K]

No - the severance from employment no longer exists.

Unless the participant qualifies for a distribution under another plan term (age 59 1/2 for example) do not distirbute the funds.

[Belgarath]

I don't have a specific cite for you, just my opinion. I'd say that yes, he's entitled to the additional distribution. The termination of employment was a valid "distributable event" and according to the plan terms, I'm assuming he was entitled to a distribution of his entire account balance? If so, then the fact that he was rehired in the interim shouldn't override his right to that distribution.

[FundeK]

I agree with BobK, there is no longer a distibutable event. So the participant is not entitled to a distribution.

[Guest mmc]

I see both points of view, he was entitled to his account balance when he terminated. The fact that a portion of his account balance consisted of a receivable is irrelevant. But then again, once he is rehired there is no triggering event for a distribution.

[david rigby]

I agree with BobK. Several prior discussions on this topic. Perhaps you can Search for them.

[KJohnson]

Here's the text of Q&A 44 from the 2000 Enrolled Actuaries Meeting (of course separation from service is no longer the "trigger" even for (k) amounts but I think the logic fits). While helpful, it really is a "non-answer"

"A 401(k) participant incurs a bona fide separation from service. Two years later she returns to employment with the sponsor before having elected a termination distribution of her 401(k) account. Can the plan allow her to take a distribution of her pre-separation balance before she again separates, attains age 59 1/2 or encounters a "hardship"? If the plan is silent, may she demand a right to withdraw those amounts?

RESPONSE

A distribution may be made once a bonafide triggering event has occurred. However, if the person does not elect the distribution within a reasonable time frame, it is interpreted that the person chose to leave the value of her account on deposit. Once reemployed, the individual would need a second triggering event in order to be able to receive a distribution. The plan could provide that the distribution is not available if requested while the plan sponsor currently employs the individual. If the plan is not clear, the Plan Administrator would be responsible for the interpretation of the plan."

[TBob]

I am not sure that I agree that the participant can't have the receivable.

I do agree that when a participant terminates and therefore has a distributable event, that a valid election must be made before he is rehired or the event no longer exists. However, if the participant made a valid election, while terminated, and is then rehired, the election stands and he should get the distribution.

In MMC's original post, he said that the participant received a distribution except for the receivable. I assume (maybe to my detriment) that he made an election for the distribution. I also assume that he elected to receive 100% of his benefit. The election should apply to the receivable as well should it not?

[Belgarath]

I looked through some discussion threads. Many of them appear to rely on the Q&A 44 that KJohnson posted as the authority for opining that a rehire negates the "triggering event."

I guess when all is said and done that a lot of us will agree to disagree on this subject. Most documents I've seen are pretty clear - cutting out all the gobbledygook and cross referencing and paraphrasing a bit, they say, in essence, that

(A) your account balance/accrued benefit is your total interest in the plan. And it includes any amount receivable but not yet contributed by the employer.

(B) if there's been a "distributable event" - generally a defined term that includes termination from employment, then you can elect a payout of your accrued benefit/account balance.

If you have made a valid election to receive distribution of your accrued benefit/account balance, which includes the receivable, I'd argue that unless your document provides something to the contrary, that there is an obligation to pay the entire benefit to the participant. This assumes that the participant made a valid and timely election PRIOR to being rehired. I agree that if rehired prior to an election to receive a distribution, that there would have to be a new distributable event.

[ESOP Guy]

Does anyone have anything more up to date? I found a Q&A from 2006 at an American Bar Assoc meeting.

We have an ESOP participant that was rehired before the 5 year wait to start distributions was over. So we are taking the position that now he is in employement he can not take a distribution. He is saying it is 5 years after he terminated so give him his money.

Any thing good cites will help.

This is one of those things that happens all the time that the authorities seem to refuse to give good guidence on how to deal with the situation.

Thanks.

[masteff]

Does anyone have anything more up to date? I found a Q&A from 2006 at an American Bar Assoc meeting.

We have an ESOP participant that was rehired before the 5 year wait to start distributions was over. So we are taking the position that now he is in employement he can not take a distribution. He is saying it is 5 years after he terminated so give him his money.

Any thing good cites will help.

This is one of those things that happens all the time that the authorities seem to refuse to give good guidence on how to deal with the situation.

Thanks.

FWIW - I'd have started a new thread since ESOP is just enough different. That said....

409(o)(1)(A)(ii) {emphasis added}: "which is the 5th plan year following the plan year in which the participant otherwise separates from service, except that this clause shall not apply if the participant is reemployed by the employer before distribution is required to begin under this clause"

[QDROphile]

The plan document should address this issue. As you say, it happens all the time, so a competent document would deal with it. One would then look to the determinination letter for some comfort that the plan's disposition is in accordance with section 409(o).

[ESOP Guy]

Thanks guys I just missed it. There it is in the document and code.

I have been doing ESOPs for almost 18 years now and if I ever had someone push this idea before now I don't recall it.