Separation from service and independent contractors

[Guest TroyRiley]

Can anyone point me to recent revenue rulings or other guidance that addresses whether an employee separates from service when he works for years at an agency, terminates employment, and comes back the next week as an independent contractor? I work for a state agency, and our employee is a member in the state's defined benefit plan. We believe there was separation from service and that the employee should be entitled to a distibution from the plan. However, the plan is saying there was no separation from service. Thanks for any information you can provide.

[Demosthenes]

I'd start here;

http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html

A discussion of the differences between employees and independant contractors for the purposes of withholding income taxes.

I've seen this type of situation before where because of budgetary or other considerations, an organization will separate an employee and rehire them as a contractor. The Plan may consider to be the individuals status as a contractor to be a sham and thus no separation of service has occurred.

If this is, in fact, what happend, you've got other issues to deal with above and beyond the plan distribution.

[Harwood]

An ex-employee who is doing the same job for the same employer is very unlikely to be an Independent Contractor.

[mbozek]

IRS has approved distributions from qualified plans where employee returns as independent contractor if there is a written agreement specifying the employees duties that conforms to the FICA/ FUTA regs for independent contractors. PLR 8931054. This occurs frequently when senior officers retire from corporations. However, the plan can have its own rules on what is separation from service for commencement of distributions.