Terminated participant and rehiring

[cdavis25]

A participant wants to retire and enter pay status with an annuity. Then, come right back to work part time for the employer in two weeks. He is 68. The Plan does not allow for in-service withdrawals, except RMDs. I know the IRS has said you cannot simply quit to enter pay status and come right back to work. Does anyone have any IRS guidance on this?

[david rigby]

1. The EE does not make hiring decisions. If the ER wants to rehire a former/retired EE, that is the ER's decision.

2. A plan may be amended to permit distribution in-service if the EE is at or beyond NRA, but this is not a required plan provision.

3. A plan may be amended to permit distribution in-service if the EE is age 62+ (regardless of any early retirement definition), but this is not a requried plan provision.

[BG5150]

^ But once you do that, you're suck with it, right? In-service withdrawals (except hardship) are a protected benefit, I think.

(Unless you want to start tracking benefits accrued to the date of taking away the benefit, and the accruals after.

[cdavis25]

They do not want to lose the employee. He wants to enter pay status and work part time. He really is not retiring. He just wants to stop working and enter pay status. Then, he will come right back to work on a part time basis. They want him as an employee and are willing to do this. I told them the IRS has stated that you cannot do this. They want IRS documentation, which is what I am looking for.

It is fact and circumstances, but we recommended a longer break to show his intent was to retire. Then, he could be rehired.

I said why not just amend the Plan to allow in-service at NRA. For some reason, that is beyond me, they do not want to do that.

[BG5150]

Could they pay him on a 1099?

[masteff]

They want IRS documentation, which is what I am looking for.

At least part of it comes from the sham transaction doctrine. Google: sham termination irs

One Google result provided a link to an interesting PLR: http://www.irs.gov/pub/irs-wd/1147038.pdf Skip to paragraph on the next to last page that starts "We have concluded". Also look 2 paragraphs above that at the cite from the proposed regs preamble.

If you search this board for the word sham, you'll find a couple of relevant threads. For example, this one might be interesting reading: http://benefitslink.com/boards/index.php?/topic/43314-employee-termination-and-rehire-for-rollover Among other discussion, it cites a case in which IRS said a 4 month break was acceptible.

And in response to item #3 (on pages 2-3) here: http://www.americanbar.org/content/dam/aba/migrated/jceb/2006/JCEBQAwithIRSfor2006.authcheckdam.pdf the IRS uses the term "bona fide".

[david rigby]

He wants to enter pay status and work part time. He really is not retiring. He just wants to stop working and enter pay status.

It is fact and circumstances, but we recommended a longer break to show his intent was to retire. Then, he could be rehired.

I said why not just amend the Plan to allow in-service at NRA. For some reason, that is beyond me, they do not want to do that.

Your recommendation is (probably) the best one. The ER should understand that rehiring a retiree is OK, but when it is done to "fake out" (not a technical term) the actual plan provision, that is getting very close to the word used above: "sham". Also, don't overlook a related word: "fraud".

It is easy to avoid this problem by amending the plan. Never look for trouble, and especially not when the IRS is involved.

[cdavis25]

Thanks Masteff. Those are useful. Thank you everyone else too for your input.