HELP! Quit then rehired as Consultant

[Surfer451]

Hello, 

If an employee quits and gets rehired as a consultant with no benefits, do he/she have the ability to cash out their 401K? 

Thanks for your help! 

[Belgarath]

Assuming a couple of things, yes.

1. 401(k) Plans CAN, but rarely do any more, restrict payouts to being unavailable until Normal Retirement Date. Perfectly legal, but I haven't seen such a provision in YEARS.

2. The real question is always whether there has been a bona fide termination of employment, and the employer/employee relationship has been severed. Merely calling someone a "consultant" doesn't necessarily make them so.

Odds are good that a distribution is allowable, but you will have to check with the Plan Administrator or Employer first. Also check the Summary Plan Description, which should answer # 1 above.

[ESOP Guy]

Belgarath has hit the real issue with the whole bona fide termination.  

This is more an employment law question than retirement law question.  Is this person really not an employee is the real issue here.  

But per retirement law if it isn't a bona fide termination than you don't have a termination.  The classic example of this is someone who terminates with an agreement to come back to work after they get paid the distribution.  The whole purpose is to get the distribution.  It is hard to detect but it is something the IRS looks for. 

[QDROphile]

"hard to detect" meaning that the IRS audits few plans and the reporting done by plans and employers does not flag very well the suspicious circumstances for closer scrutiny. 

 

 

 

 

[Luke Bailey]

I think the question boils down to whether the employee really is, now, an independent contractor. Usually, if the individual has the same job, working hours, etc., and the former employer is the only client and the alleged independent contractor has no capital invested in tools, equipment, etc. (and working out of home probably doesn't count), then they are still an employee. But it depends on facts and circumstances and there are no bright lines. Make sure at least that the plan excludes employees who are treated by employer as contractors, even if reclassified by state or feds. So-called "Microsoft" provision after famous case involving Microsoft from late 90's.