Not a Sham Termination But Possibly an Issue

[EPCRSGuru]

My company considers participants on long-term disability to be active employees who continue to accrue service credit and receive employer contributions to the DC plan based on salary before disability commenced. If a participant applies for disability with our carrier and the claim is denied, the participant is terminated if he does not return to work.

This happened to one participant early last year, but he appealed his claim denial and won. So now he is being retroactively placed on LTD and his termination of employment is being retroactively cancelled--over a year after his termination. We are retroactively calculating the employer contributions he would have received had he not been terminated. But of course nothing is ever easy--when he terminated he requested and received a lump sum distribution.

Clearly this is not a sham termination, but are there any potential legal/tax ramifications to either the Plan or the participant? He was already vested regardless of his disability status and we do not require repayment to have service restored to him. I think we are all in the clear but can anyone see any issues that I should discuss with outside counsel?

[QDROphile]

In general you might consider how you are complying with section 415 limits when absence is extended. Your mention of carrier suggests that a disabled individual's compensation, as defined in the plan, might be very low or zero.

[Kevin C]

1.415(c )-2(g)(4) has special rules for allocations to totally and permanently disabled DC participants.