Severance

[rlb64]

Employee is having financial difficulty. Employer is willing to terminate the employee so that he can receive a full distribution from his 401(k) and then rehire.

What are the risks?

[E as in ERISA]

Invalid distribution. Plan disqualification.

[Alf]

Yep. It violates 401(k) and 401(a) and the plan could be disqualified by the IRS, so all vested account balances could be taxed to the employees, the trust would be taxed on all earnings each year under the high trust tax rate schedule, and the employer would lose deductions for any current and future contributions.

[david rigby]

Does the plan have a hardship provision? If not, is the ER willing to add it?

[rlb64]

It does, but they want to keep it safe harbor.

[rlb64]

How would the IRS distinguish this from any other type of rehire?

[WDIK]

If a sham termination falls in the forest and the IRS is not there to hear it, does it make a sound?

Such a scenario may be difficult to detect on an audit, but certainly BenefitsLink members hold themselves to a higher, ethical standard.

P.S. There are a number or previous discussion that can be found searching for "sham termination."

[buckaroo]

What about a loan?

[austin3515]

Is all of the money 401(k)? Match/PS/RO money can be withdrawn in service for any reason (assuming the doc says so, and the doc could be amended to say so).