LUMP SUM TO REHIRED PARTICIPANT

[Guest ROB VIDOVICH]

I HAVE A 401(K) PLAN WHERE A PARTICIPANT WAS TERMINATED IN 2001 WITH NO BREAK IN SERVICE AND WAS REHIRED IN 2002. THIS PARTICIPANTS VESTED BALANCES WERE IN EXCESS OF $5,000 AND DISTRIBUTED BEFORE BEING NOTIFIED THAT THIS FORMER PARTICIPANT WAS REHIRED AND A PARTICIPANT AGAIN. THE PARTICIPANT WAS 100% VESTED. THE DISTRIBUTION WAS RECENTLY DISTRIBUTED IN MAY AND THE PARTICIPANT HAS NOT CASHED THE NET PROCEEDS CHECK. THE FEDERAL TAX CHECK HAS BEEN DEPOSITED INTO THE COMPANY'S FEDERAL TAX WITHHOLDING ACCOUNT.

WHAT IMPACT WILL THIS HAVE ON THE PLAN AND PARTICIPANT???

SHOULD WE HAVE THE PARTICIPANT REDEPOSIT THE CHECK BACK INTO THE 401K PLAN AS A ROLLOVER???

PLEASE ADVISE!!!!!

tHANKS.....

[g8r]

There are two ways to approach it. One is that the plan shouldn't have made the distribution. In that case, you would follow rev. proc. 2002-47 (EPCRS) for paying someone out. I'd go to the Q & A columns on plan corrections to see the permissible correction methods.

The other approach is that the distribution was permissible and therefore you don't do anything. The support for this is that assuming the termination of employment was bona fide, the individual had a distributable event (I'm presuming the plan permits distributions upon termination of employment). The issue is whether the subsequent rehire nullifies that distributable event. And, again assuming the termination was bona fide, you can make a good argument that the distribution was permissible and the plan doesn't need to take any corrective action.

[ccassetty]

If I'm reading your question correctly, the check was cut after the participant was rehired, in which case it is not permissable. If the check was cut prior to the participant's rehire, then it is permissible. Once the participant is rehired, there is no distributable event, you can't make a distribution on account of termination to someone who is currently employed. You should ask for the check back or put a stop payment on it.

Carolyn