Former Employee & Pension Plan Participant as Consultant

[erisa_novice]

Hi all, I have a question regarding possible ERISA restrictions on payments to a participant in a defined benefit plan. The plan at issue is a single employer, defined benefit plan. The participant, 65 years old, commenced payments under the plan in January 2017. The participant retired from employment with the employer in December 2016. Either then or in January 2017, the employer paid the employee severance pay as well as pay for unused personal/sick days. The employer now wants to bring back the former employee and pension plan participant as a consultant for a few months. The former employee would be under a consulting agreement which provides that they are an independent contractor, working up to 40 hours per week. The amount of compensation is a small, monthly payment. Is there anything in ERISA or the internal revenue code which would limit how much the employer can pay this former employee/pension plan participant, taking into account their severance, payout for unused sick days, and consulting retrainer? Are there any provisions of ERISA (and the IRC) which the employer should pay special attention to?

[Effen]

It is a facts/circumstances standard.  

First, what does the plan say about in-service distributions.  Some plans permit employees to receive retirement benefits upon attainment of Normal Retirement without a separation from service.  If you plan permits this, than it becomes a non-issue.

If your plan requires a separation from service, then the fact/circumstances kicks in.  What was the participants intent when they left employment in December.  Did anything change in January that caused them to return to work.  Is it a real "consulting" job, or does the sponsor still control the "consultant".

I wouldn't be worried about the personal/sick time, but you might want to make sure the benefit was calculated with the correct compensation and service and that the additional comp/hours won't impact the benefit.

The "re-hire as a consultant" might be a more sticky issue, especially if it was pre-planned and the employee really just wants to keep working and collect a retirement benefit at the same time. 

 

[erisa_novice]

The plan is silent on in-service distributions except as providing that the participant's entire interest will be distributed to them upon the participant reaching age 70 1/2, regardless of whether or not they are still working. The former employee/participant has not returned as a consultant; it is something the employer is considering but the employer seems to think that ERISA and/or the IRC places a monetary limit on how much someone participating in an employer's pension plan may be paid in a year. The employer is concerned that paying the employee severance, plus unused sick days, and possibly a small monthly fee as a consultant could run afoul of ERISA and/or the IRC or some other law. Is that the case?

[Effen]

No such restrictions in a qualified ERISA plan, but there might be offsets for Social Security and/or Medicare benefits.

Since there is no in-service option, they will likely need to suspend his retirement benefit if he comes back to work.  If it is a bonafide consulting arrangement, then probably no problem - but the facts matter.

If he wants the guy back, best option is to amend plan to allow for in-service @ NRD, but that would need to be available to everyone.  

 

[erisa_novice]

Thank you so much for your assistance. Is there anything in particular you would recommend be included in the consulting agreement to ensure it fits in the mold of a bonafide consulting arrangement?

[Effen]

That sounds like a question for the attorney.