Terminating a participant so they can take a distribution

[Chippy]

A participant wants their employer to terminate them, so they can take a distribution from the plan, and then have the employer rehire them. They could take a loan, but the participant doesn't want to have a loan payment. They do not meet hardship needs either. So, is this legal? It sure doesn't seem right. Any thoughts?

thanks

[david rigby]

It amuses me that an employee thinks he/she has the authority to tell the employer what to do.

Just my opinion: I suggest you search these Message Boards, using the word "sham" or "fraud".

[RatherBeGolfing]

A participant wants their employer to terminate them, so they can take a distribution from the plan, and then have the employer rehire them. They could take a loan, but the participant doesn't want to have a loan payment. They do not meet hardship needs either. So, is this legal? It sure doesn't seem right. Any thoughts?

thanks

Nope. When both employee and employer knows with reasonable certainty that the employee will continue to perform services for the employer, severance of employment has not actually occurred.

[QDROphile]

The fact that the employee has suggested the term/rehire fraud now prevents an innocent term/rehire, wink, wink, nod, nod.

[QDROphile]

The fact that the employee has suggested the term/rehire fraud now prevents an innocent term/rehire, wink, wink, nod, nod.

[Flyboyjohn]

Why couldn't they take a loan and then immediately default?

Avoids the winks and nods

[ESOP Guy]

Why couldn't they take a loan and then immediately default?

Avoids the winks and nods

Once again if the plan administrator has reason to believe the loan isn't going to be paid back the loan can't be issued. The rules are clear the loan has to be issued on terms that are commercially available any commercial bank would only give a loan that is expected to be paid back.

Strictly speaking is there a way to do what this person wants to do? Sure if you are willing to play in the grey areas and ignore things like is this a sham termination or a sham loan. But you could very easily get all the right paperwork. Even have a few loan payments be made from this person (The loan would have to not require payroll deduction payments.) and the chances are you won't get caught. But if the question is will I get caught don't bother asking here just do it. If the question is there a risk free way to do this then the answer is "no".

[Peter Gulia]

To determine whether something is a participant loan that might meet conditions for ERISA's statutory prohibited-transaction exemption:

"The existence of a participant loan or participant loan program will be determined upon consideration of all relevant facts and circumstances. Thus, for example, the mere presence of a loan document appearing to satisfy the requirements of section 408(b)(1) will not be dispositive of whether a participant loan exists where the subsequent administration of the loan indicates that the parties to the loan agreement did not intend the loan to be repaid."

http://www.ecfr.gov/cgi-bin/text-idx?SID=e3a3147a70d22f29bb42e4675a67fe47&mc=true&node=se29.9.2550_1408b_61&rgn=div8

[Flyboyjohn]

While I agree with all the posts regarding the sham termination of employment vs. the sham loan I submit that there's a material difference in plan sponsor risk.

The sham termination of employment requires knowing participation in the scheme and could result in plan disqualification.

The "sham" loan does not necessarily involve the plan sponsor (don't some recordkeeping platforms issue plan loans without sponsor involvement?) and as long as the form of the loan is in order I don't see how the "intent" of the participant comes back to ding the employer.

[Peter Gulia]

I concur with Flyboyjohn; an employer/administrator should not be responsible for a breach of its fiduciary duty to administer the plan according to its document and ERISA unless the employer/administrator knew the participant intended not to repay.

[GMK]

At last, justification for non-bankers' offering loans from a RETIREMENT plan.

As noted above, the employer or PA is probably shielded from fiduciary breach if the Plan's standard loan agreement is used and the standard terms and conditions apply (which could include payroll payments, as ESOP Guy mentioned). Otherwise, if non-standard documents are used, the employer or PA should probably be ready with a valid reason to justify why it approved special loan terms, in the event some authority person asks.