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What does the plan document say?

It's called subrogation and is very common. Some states prohibit insurers from subrogating, so often fully insured health plans are prevented from doing so. Self-insured health plans are not subject to state anti-subrogation laws, so usually can subrogate more freely. The plan materials (plan document, SPD, etc.) should address the plan's subrogation rights. Usually, personal injury lawyers will send ERISA document requests to the group health plan sponsor at the outset to confirm whether the plan can subrogate.

This really is the only answer that can be given. Some plans have the 5 break language in it and other don't. I would add the rule of parity could come into plan if either of these people had a vested balance while in the plan before. A good plan document will spell out how to handle rehires clearly. Some don't and I consider them poorly drafted by definition. But the document is your friend here.

If termination were the magic uncancellable ticket that allowed a distribution at any time thereafter, we wouldn’t have all the historical fuss about whether or not a termination is a valid termination because of the prospect of re-employment and whether the prospect of an expected rehire prevents the distribution. The point is that if the participant is employed at the time of distribution (or is expected to be re-employed within some “who knows what time” shortly after the distribution) a distribution can only be made under whatever in-service distribution rules apply. As I suggested in my earlier post, the burden should be on the participant in this situation, not the initial administrative functionary. If the participant is entitled to a distribution, the participant can make the case under the claims procedure with all of the reasoning and legal authority that the participant can muster, spelled out for consideration.

If the employee is really that important to the employer, give them a bonus, forget about the plan, and get everyone back to work?

and some have one year hold out with retroactive re-entry, which doesn't really work with 401k plans

So, and I may be oversimplifying but it's Friday afternoon and a cold one is calling my name, the sole prop contributes $50,000 for example and say $1000 is attributable to the life insurance benefit, (s)he can only deduct $49,000 so there is no reporting of the $1000 PS58? Cool, I learned something today! Now about that cold one ... hope everyone has (or had if you're reading Monday) a great weekend.

Agreed, and I would be very surprised if the plan document doesn't address this clearly. The document almost certainly does not say that participants can be paid out "after a distributable event" or something along those lines. It's much more likely it defines termination distributions, or distributions after severance of employment, and then stipulates that those are payable only to terminated participants who have had a severance that ends their employment with the sponsor/adopting employer. (A rehired employee would not be a terminated participant and would not fall in this category.) Our document specifically says "No distribution shall be made if the Participant is rehired by the Employer before payments commence" which is nice because it leaves no room for ambiguity!

I'm going to say that it would only be for active employees. The statutory and regulatory language refers to "employees" rather than "participants." So I think if terminated, just a regular withdrawal, and premature distribution tax, if otherwise not exempt, would apply.

Sure it's allowed. In fact if the Plan Document says comp is not limited to when they are a participant, not only is allowed, it's required.

Unless there is explicit language in the plan document, SPD or other formal plan communication saying the request is valid when put in the mail (which I highly doubt there is), then the Plan Administrator could reject the distribution based on the status of the participant when the paperwork arrived. I suggest you discuss the situation with the Plan Administrator (unless you are a 3(16) provider with authority to make this decision) and discuss options. This situation has occurred a handful of times among our clients and most of them decided to reject the distribution request. Very few have approved the payment. In all cases, it was not our decision.

The provision in the act specifies that a High Paid person is an individual whose 3121(a) wages in the prior year were over $145,000. That specific reference does not describe compensation earned by self-employed individuals such as sole proprietors and partners. Since the statute specified 3121(a) wages, it is not clear if the IRS has a path to extend the definition of High Paid to self-employed individuals without literally without an act of Congress.

If it were my own plan, I'd change it prospectively. If you're concerned about it, I'd file an amended return for any open tax years but I doubt an auditor would raise a stink over the correction to the effective date of the plan that was running for over 25 years and doesn't really impact anything current. Either way you should present the options and costs to the prospective client and let them make the call. 1 fix it prospectively 2 fix open tax years that could be subject to audit 3 fix all years back to 1998 (which seems kind of crazy to me but I suppose it's an option)

The State of Confusion?