Jump to content

Distribution timing when participant is re-hired


Recommended Posts

Have a "splitting hairs" question.  Plan document reads:

(6)   Return to employment. A Participant may not receive a distribution based on Separation from Service, or continue any Installment distribution based on a prior Separation from Service, if, prior to the time the Trustee actually makes the distribution, the Participant returns to employment with the Employer.

At issue is the meaning of the phrase "Participant returns to employment" in the last sentence.  I contend that the employee has returned on the date he or she begins working.  I base this on the fact that his/her re-hire date is the date he/she begins working, not the date called.  Another party interprets that the employee has "returned to employment" if he or she has been notified they are being called back to work.  A distribution was in process to the terminated employee.  Before the funds were paid out, both parties were notified that the employee had been re-hired with an effective date three weeks in the future.  I contend we should not stop the distribution.  The more conservative party (who by the way is very highly regarded and I have the utmost respect for) states that because we know he will be rehired, he has "returned to employment" and we should stop the distribution. 

I've made my decision but am curious to run this by other experts out there.  Thanks much!

 

Link to comment
Share on other sites

IRS would look at all the facts and circumstances. Use of the words "called back" indicates to me that this was a layoff that could have been expected to be temporary and not a termination of employment. Also, I would look at how long the person was "terminated" and what the plan language says. If there was no break in service then upon rehire, the plan likely says it was as if the employee never terminated. But this really looks through the context of an employee quitting to get their retirement funds and then showing up to get their job back afterwards. If the separation was employer initiated then I'm more comfortable with the payout - but again, I think the F&C have to support this. Were all employment related benefits terminated, COBRA offered, etc. I also tend to be more conservative in this area.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

Link to comment
Share on other sites

1 hour ago, Kansas401k said:

Have a "splitting hairs" question.  Plan document reads:

(6)   Return to employment. A Participant may not receive a distribution based on Separation from Service, or continue any Installment distribution based on a prior Separation from Service, if, prior to the time the Trustee actually makes the distribution, the Participant returns to employment with the Employer.

At issue is the meaning of the phrase "Participant returns to employment" in the last sentence.  I contend that the employee has returned on the date he or she begins working.  I base this on the fact that his/her re-hire date is the date he/she begins working, not the date called.  Another party interprets that the employee has "returned to employment" if he or she has been notified they are being called back to work.  A distribution was in process to the terminated employee.  Before the funds were paid out, both parties were notified that the employee had been re-hired with an effective date three weeks in the future.  I contend we should not stop the distribution.  The more conservative party (who by the way is very highly regarded and I have the utmost respect for) states that because we know he will be rehired, he has "returned to employment" and we should stop the distribution. 

I've made my decision but am curious to run this by other experts out there.  Thanks much!

 

I go with your more conservative party.  It is very much a facts and circumstances issue; the issue of "employment status" is much more difficult than obvious, and impacts many issues outside of just our retirement concerns.  But in this case, I would ask the question "has he been re-hired", and if the answer is yes, then he has returned to employment, even though he's now on a three week "leave of absence".

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

Link to comment
Share on other sites

I think I would side with your original position on this one, Kansas401(k). This is not a situation where a participant who wants access to funds has a planned fire/rehire. It sounds like he or she had a real separation, entitling him or her to distributions. The plan document stops those distributions once he or she "returns to employment." The employee got a job offer to go back to work 3 weeks hence, and accepted. That does not mean he or she has "returned to employment." Just means he or she is very likely to return to employment in 3 weeks, but a lot can happen in 3 weeks.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

Link to comment
Share on other sites

Since the Plan provides no further explanation of the meaning of "returns to employment with the Employer," it is the Plan Administrator's responsibility to interpret the meaning of the phrase as applied to these facts. The PA should document its reasons for interpreting the Plan document one way or the other and then apply this provision consistently going forward.

That said, I agree with the other comments here that the participant will not have returned to employment until they show up for work.  Until that day, the participant and the employer both presumably have the power to change their mind (at-will employment).

In addition, and I base this on my recollection of the ERISA Committee report, pension payments are meant to be a replacement for wage payments. Therefore, until the day the participant is returned to the payroll, it is justifiable to make pension payment since it will be paid for its intended purpose.

Link to comment
Share on other sites

If the employee left for other employment and is being "brought back" after termination, it would seem to be a more supportable argument as opposed to someone being "on call" and having no other employment. 

Whether this arrangement is truly a separation/severance of service or could be considered a 'sham' [non-paid vacation] to obtain qualified retirement plan funds should carry a heavy consideration due to tax consequences of disqualification or penalties/sanctions.

As indicated, all facts & circumstances are to be considered by the Plan Administrator and all risks should be contemplated in terms of how this transaction may be viewed by the IRS.  I've been involved with a distribution rejection letter where the Plan Sponsor openly indicated the plan participant's only recourse to obtain plan funds was to terminate and be rehired after the distribution.

ERPA

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...