Rehire of participant who is receiving an installment payout

[Guest Hadden2001]

A former employee has terminated and is currently receiving his installment payments with several more to go until final payout. He is now rehired. There is no issue of sham seperation of service, so I assume that continued payout of the installments would be appropriate even though the individual is now employed. Any thoughts?

[Guest Harry O]

What does the plan document say?

Also, if the installments were designed to avoid the section 72(t) early distribution penalty, stopping the installments at this point might trigger retroactive application of the 10% penalty.

[mbozek]

is this a mp, 401(k) or PS plan?

[Guest Hadden2001]

The Plan is a stock bonus plan (formerly an ESOP), which is completely silent as to all rehire issues.

[RTK]

My thoughts. If not sham separation, there are no Code or ERISA requirement that installments stop. If plan is silent, arguably installments should continue since there would be no provisions authorizing (or requiring) plan administrator to stop the installments.

[mbozek]

The employer has the following options:

1. continue payout on the grounds that it was validly entered into at the time of separation under the terms of the plan

2. with the employee's consent suspend payment upon reemployment. Plan should be amended. Under Dol reg. 2530- 203-3 a plan may provide for suspension of benefits in pay status but is not required to do so.

[KJohnson]

I would be careful in amending the plan to provide for suspension of benefits upon rehire. Several years ago Carol Gold took the position that the labor regs are pre-REA and that REA (at least from a Code standpoint) "trumped" these regs with 411(d)(6). Thus, by adding a suspension provision to an existing plan you are actually eliminating an optional form of benefit (i.e. the ability to receive installment payments while still employed).

I don't fully agree with this position and don't know whether this is still the IRS's view.

With the subsequent revisions to the 411(d)(6) regs a dc plan can now eliminate installment payments entirely as long as you had a lump sum distribution available at the same time that the installments would begin. Of course you could not apply this to someone already in pay status.

[RTK]

The 5th circuit, when considering a challenge to an amendment to a multiemployer pension plan's suspension of benefit provisions, held that the ERISA anticutback provisions did not apply. The case was Spacek v Maritime Association. 134 F.3d 283 (1998). I do not know if other courts have considered the issue.

[KJohnson]

Actually--Carol Gold's comments were made with regard to the Spacek decision. She indicated that the IRS did not agree with the 5th Circuit's positon. Also, although I haven't read it recently, I recall that the 5th Circuit in Spacek focused on benefit reduction issues and not elimination of optional form (which always struck me as kind of missing the mark).

[Guest Hadden2001]

Thank you for all the thoughtful responses. I analyzed the situation in the exact same manner as you did RTK.

[RTK]

KJohnson had good comments. I noted the case because it is the only one I am aware of on the issue. My recollection is that the participant in that case challenged the amendment as a reduction of an early retirement benefit, and not as the elimination of an optional form. But, it should help in the event of an ERISA challenge to an amendment of a plan's suspension of benefits provisions.

Given the IRS's position on the application of 411(d)(6) to a SBJPA change to the required beginning date (which has always been a little irritating since the Code forced the provision into the plans in the first place), I suspect the IRS still does not think much of Spacek. Nonetheless, I have implemented more restrictive suspension of benefit provisions, but with the approach of securing an IRS letter for the amendment.