Distribution processed after participant is rehired

[pam@bbm]

Participant terminated in May. She completed distribution paperwork, the employer signed the form and we processed her distribution in July. Now the employer notified us that they changed her status from terminated to on-call in June. The distribution was done as a rollover. Do I need to request the funds back? The participant is too young for an in-service withdrawal.

Thanks for any advice

[QDROphile]

Why do you need to do anything other than report the facts and status? Are you the plan sponsor or plan administrator?

[pam@bbm]

I'm the TPA, just looking for some guidance.

[Mike Preston]

Way back when this issue was of major concern to those who sponsored money purchase plans there was a time when the existing guidance, sparse as it was, pointed towards the need to reverse the payment. I don't know when it happened or what the specific citation was, but somewhere along the line the conventional wisdom changed to a view something like the following:

If the distribution was acceptable absent the re-hire, then it can proceed notwithstanding the re-hire.

I don't have time to look up the cite, but I'm fairly confident of the conclusion.

[ESOP Guy]

I believe what Mike is summarizing is from the latest instructions on self-correction. I would start your research there but I believe Mike is correct.

[QDROphile]

If you are the TPA, then the guidance you need in the matter should come from the plan sponsor or the plan administrator.

[hr for me]

I would also look at the dates that forms were signed. It sounds like the employer signed off on the distribution at the time, but where does that fall on the who May-July timeframe? I have to wonder though if the employee waited to request the distribution after she was already back on call.

[david rigby]

Yes, review the 'self-correction" literature.

The only Gray Book Q&A on point is 2008-44:
QUESTION 44
Other DB Plan Issues: Termination/Rehire – Impact on Payment of Benefits
An individual terminates employment and becomes eligible for distributions from the employer’s DB and DC plans. Distributions are available to commence any time through NRD and may be paid in lump sum or annuity form. The individual begins employment with an unrelated firm. Some time later, the individual is rehired by a company within the employer’s controlled group (or the new company is purchased by the old company). Does the rehire (or purchase) change the status of the individual’s bona fide severance from employment for purposes of IRC §§ 401(a), 401(k)(2)(B)(i)(I), or -- in the case of a tax-exempt employer -- 403(b)(11)(A)

RESPONSE
The rehire does not change the status of the original severance from employment. Absent plan provisions specifying that benefit distribution rights are suspended, or that benefits in pay status cease upon re-employment, the participant would have a right to assert a claim for benefits on account of the original bona fide termination. A plan amendment adding rules to such a plan to mandate deferral or suspension on account of rehire within the controlled group would violate the anticutback rule if imposed on previously accrued benefits. As noted in the response to question 21 of the 1999 EA Gray Book, “re-employment does not inhibit the ability to permit a distribution on account of "separation from service" based on the earlier termination of employment.”


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[Belgarath]

Why would self-correction procedures address this? By that I mean, if it is acceptable in the eyes of the IRS, why would any self-correction be involved?

I'd be interested in any official citation as well, if anyone knows of one. It may just be one of those things where the IRS has addressed it at several conferences/public forums?

[ESOP Guy]

To me self correction would be needed if they payment did in fact happen after the rehire had happened. There is no distributable event if the rehire had happened. If they payment happened while the person was still terminated then there is no issue.

The original question is a bit vague on the timeline. But I am assuming Pam wouldn't be asking unless the payment happened after the rehire had happened.

[jpod]

The stated facts suggest that there is a more fundamental issue here, which is whether there was a bona fide termination of employment in the first place. My guess is there was not. I don't know what "on call" means in this situation, but it usually implies an employment relationship with variable hours at the direction of the employer.

[My 2 cents]

The stated facts suggest that there is a more fundamental issue here, which is whether there was a bona fide termination of employment in the first place. My guess is there was not. I don't know what "on call" means in this situation, but it usually implies an employment relationship with variable hours at the direction of the employer.

The termination might have been bona fide if there was no expectation on either side of a return to work in an on-call status. The entire thread seems predicated on the idea that being on-call means that there is a sufficient employment relationship for it to possibly be an in-service distribution issue. Would it matter if the person hasn't even been called to come in yet?