Distribution ?

[Guest rachd]

I have an employee who wants to "quit" in order to get his 401K Profit Sharing account balance out because he desperately needs to buy a car. The intention is that he will be hired back immediately after. However, this does not seem right to me and I'm thinking there are rules that would apply. Can anyone get me headed in the right direction as to where I would find information about this kind of situation.

We have offered to do a loan and he states it's not enough so we also have offered a hardship distribution (since it allows for employer discretion). This employee seems convinced that terminating, receiving his balance and then being rehired is the way to go. I would rather not allow this practice but can't seem to find information to back me up.

Any help is appreciated!

Thanks,

Rachel

[WDIK]

I have had similar situations in the past and was not able to find any definitive timeframe that an employee must be terminated. I also would appreciate any comments.

One thought has to do with the administrator making a determination on the claim. In general, the plan administrator has up to 90 days to reach a decision. Perhaps, this guidline could apply. Is the participant willing to be terminated for a 90 day period while the claim is reviewed?

[ccassetty]

If the plan allows distributions only for termination of employment, and the employee is being "terminated" with the guarantee of being hired back in X days, I would call that a leave of absence, not a termination eligible for a pay out. I don't need any cites to tell me that. Sham terminations are just that, don't be a party to it.

[Guest jfp]

There must be a bona fide termination of employment; length of time is merely evidence of the existence of or lack of a bona fide termination. If it is a bona fide termination, there is nothing to prevent the plan from making a distribution even after he is rehired, but obviously that would not look good and it gets back to the question of evidence.

Here's what you should do. Tell the employee that if he quits you cannot guarantee when, if ever, you will hire him; in fact, put that in writing.

If you do not wish to see the employee leave, try to work something out for him that does not involve messing around with the plan.

Do not, under any circumstances, either in writing or orally, tell the employee before he quits that you'll rehire him. For example, don't tell him that he has to sit out for 90 days and then he can come back. Don't promise him anything.

If he actually does quit, you can pay him his benefits, and if you've followed the above advice, theoretically you can rehire him the next day, but I'd advise you to wait at least one month longer than the amount of accrued vacation and/or sick leave he can collect upon quitting.

[ccassetty]

If you insist on going forward with this scenario, which I strongly advise against, I would add two things to jfp's advice. 1st: don't rehire the employee prior to the payout being made, because the employee has to be terminated when the check is cut for it to be a valid pay out. 2nd: If the employer just pays lip service to no guarantees about rehire, but fully intends to rehire the employee regardless, then I think the "termination" would still be questioned. What about actually beginning the processing of looking for a replacement? What about providing the COBRA notice? If this is to look like a real termination, the employer should treat it like a real termination. Is the employer really willing to do that?

[R. Butler]

We have had this issue come up several times this year. Ccassetty is right; don't be a party to this.

There used to be Q&A by Nicholas Ferrigno & Frank Bitzer (it seems to have disappeared.) They suggested that if the employer participated in such a sham, the employer would be exposing itself to liability for fiduciary violations of ERISA.

There was another Q&A by Martin Silfen (which also seems to have disappeared) stating that courts have held there is no separation of service if there is an understanding that the employee will return to work. Mr. Silfen cited Ford E. Wilkins, 54 T.C. 362 (1970).

[RTK]

My 2 cents - if it is in fact a sham termination, no matter what steps are taken to make the termination look bona fide (or in other words the steps are taken to conceal the sham termination), there will be ongoing exposure on both the Code and ERISA side.

[Harwood]

The Q & A by M. Silfen: http://benefitslink.com/modperl/qa.cgi?db=...ibutions&id=190