401(k) distributions

[Guest Michele Silverman]

I have what I feel is going to become a common occurance in our shop. A little background first: We had an employee who was in jail and wanted to withdrawl his 401(k) money to pay court costs, etc. Employee was advised that the only way he could get all his money would be to resign his position with the company. Gen. Mgr. stated that he would be eligible for rehire, but wouldn't guarantee his job for him. Employee gets money, a few weeks later gets out of jail and then comes back to work.

This employee is good friends with another employee and earlier this month, sec. emp. puts in his 2 weeks notice with some story that he needs to move but doesn't have a job, house, etc in new state. I get the funny feeling he needs his 401k money and is planning on asking for his job back. Sure enough, on Tues. I get a call from a cash checking place verifying that this was a former employee and an acutual check. Just 10 min. ago, I get the phone call from this employee that he needs his job back and wants to talk to the foreman.

Needless to say I have pitched a fit. Talk about extra paperwork to constantly hire and rehire these guys. I go to the GM and the Foreman and let them know my concerns because these guys in the shop feel that 401(k) "holds their money hostage" not that its a retirement account to be used when they are old. I am afraid that if they rehire this guy it will begin a rash of employee's taking the chance and resigning (not to mention they get paid all accrued Vac for next year when they resign), cashing out their 401(k) and calling to come back to work 2 weeks later.

Do, I need to worry about anything legally? Can the government come and fine us for something like this? We are following proper procedure when an employee quits, but I am afraid that our carrier will see a pattern and we could be held accountable.

Any help is greatly appreciated. It just makes me mad that they would even consider rehiring this guy.

[BG5150]

To stop that stuff, the plan can be amended to make distributions after the close of teh plan year in which the participant terminates. (maybe)

[Guest Pensions in Paradise]

Step 1 - as BG5150 said, amend the plan to provide that distributions will not be made until the following plan year

Step 2 - don't rehire people who quit. That should send a clear message to other employees!!

And by the way, point out to management that the IRS could audit the plan and take the stance that these are sham terminations. This could result in the disqualification of the plan. So you should consider seeking legal counsel to determine how to prevent this from happening in the future.

[austin3515]

For some very reason silly reason, amending the Plan to delay someone's distribution by a longer period than currently provided is a cutback (you can delay it by like a month, I think). It's somewhere in the regs, though I can't site it. This applies to all participants on a given date, so if you wanted to add a feature like this it could only apply to new participants. Not that that would be hard to administer

I have heard of practioners gambling on not getting caught (i.e., and amending the plan to provide for a delay in payout), because as you can see the havoc created by not having such a provision is significant.

By the way, you want to watch out for what's called a "sham termination." That is, "terminating" someone for the explicit purpose of allowing a distribution and then rehiring them. That's a big no no. If you search the boards you'll find lots of discussions on that.

[Bird]

Austin's right; you can't take away the right to an immediate distribution for those employees already in the plan.

Anyone who finds out he "needs" his job after he quits should have thought of that beforehand.

[jpod]

I realize this is a common and difficult problem. However, I can't go along with PinP's advice not to rehire an employee if the employer wishes to do so. The fact that the employer is in a position NOT to rehire would suggest to me that these are in fact bona fide terminations. Therefore, I would never advise an employer to sacrifice his/her business needs to protect against the risk that the IRS might incorrectly conclude that the terminations were not bona fide. What I might advise is to wait two months before rehiring, assuming the employer is willing to take the risk that the employee won't find a permanent job elsewhere between now and then.

[david rigby]

Does the plan have loan and/or hardship provisions?

[Guest Michele Silverman]

Does the plan have loan and/or hardship provisions?

It does and he already had a loan. I do appreciate everyone's feedback because it does echo my own thoughts on the matter. The story we were given for this particular instance was he was moving out of town. I had the gut feeling that he wanted the money and made up the story. Everyone else really thought he was quitting. I have emailed our retirement company to see what they suggested. On another board someone mentioned that if the person was rehired within 6 months, the IRS may look at it as an inservice distribution and we could loose our plan. I asked them for help in the matter. At this point, the GM and Foreman told him we didn't have any openings right now (which we don't). I am thinking depending on what the retirement company says, we should impose a re-hire waiting period of sorts. Something along the lines that previous employees won't be considered for rehire until after a period of 3-6 months has passed and then they are welcome to reappply for any openings.

The problem is, these guys will see one person do it and then want to jump on the bandwagon and that is what I am trying to avoid. I again thank you for all your responses and will take them to the owner.