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Yes, review the 'self-correction" literature. The only Gray Book Q&A on point is 2008-44: QUESTION 44 Other DB Plan Issues: Termination/Rehire – Impact on Payment of Benefits An individual terminates employment and becomes eligible for distributions from the employer’s DB and DC plans. Distributions are available to commence any time through NRD and may be paid in lump sum or annuity form. The individual begins employment with an unrelated firm. Some time later, the individual is rehired by a company within the employer’s controlled group (or the new company is purchased by the old company). Does the rehire (or purchase) change the status of the individual’s bona fide severance from employment for purposes of IRC §§ 401(a), 401(k)(2)(B)(i)(I), or -- in the case of a tax-exempt employer -- 403(b)(11)(A) RESPONSE The rehire does not change the status of the original severance from employment. Absent plan provisions specifying that benefit distribution rights are suspended, or that benefits in pay status cease upon re-employment, the participant would have a right to assert a claim for benefits on account of the original bona fide termination. A plan amendment adding rules to such a plan to mandate deferral or suspension on account of rehire within the controlled group would violate the anticutback rule if imposed on previously accrued benefits. As noted in the response to question 21 of the 1999 EA Gray Book, “re-employment does not inhibit the ability to permit a distribution on account of "separation from service" based on the earlier termination of employment.” Copyright © 2008, Enrolled Actuaries Meeting All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

And if the sponsor picks up the fees for the actives, it is particularly important that the terminated participants not be charged more than a fair share. The sponsor does not get to save on some of the fees they pick up for the actives by passing some of those fees on to the terminated people. It is not a system to be gamed by the plan sponsor (who owes a fiduciary duty to the terminated people no less than to the actives).

Keep in mind that you cannot charge fees to terminated particpants as such. You can charge fees to participants, and the employer can pay the fees with respect to employees. That means the plan must have a real expenses that really get paid. The real expenses determine what can be charged.

Way back when this issue was of major concern to those who sponsored money purchase plans there was a time when the existing guidance, sparse as it was, pointed towards the need to reverse the payment. I don't know when it happened or what the specific citation was, but somewhere along the line the conventional wisdom changed to a view something like the following: If the distribution was acceptable absent the re-hire, then it can proceed notwithstanding the re-hire. I don't have time to look up the cite, but I'm fairly confident of the conclusion.

My vote is YES, they are participants until their account balance in fact goes to zero.