Distribution in the mail and employer rehired employee

[Kansas401k]

I believe this is a bit different than the "fire me so I can take my money" fraud. Participant left employer in August, 2022. Earlier this month (August, 2023) participant requested distribution paperwork. Per participant the paperwork is in the mail back to us. 

Employer emailed today a list of hires and rehires and this employee is included. 

I tend to think that if the employee is employed when I get the form back, I cannot do the distribution regardless of participant's intent or the date on the form. 

What am I missing?

[Paul I]

Unless there is explicit language in the plan document, SPD or other formal plan communication saying the request is valid when put in the mail (which I highly doubt there is), then the Plan Administrator could reject the distribution based on the status of the participant when the paperwork arrived.

I suggest you discuss the situation with the Plan Administrator (unless you are a 3(16) provider with authority to make this decision) and discuss options. 

This situation has occurred a handful of times among our clients and most of them decided to reject the distribution request.  Very few have approved the payment.  In all cases, it was not our decision.

[QDROphile]

Maybe you are missing a good collection of written administrative policies and procedures, backed up by an SPD, that spell out how and when distributions are effected, such as it all depends on what is submitted in writing and when the writing is received - informal communication is not effective. But you don’t seem to need them so much under these facts as long as you are in a position that is granted discretion. If you were extremely cautious, you would deny the distribution and leave it to another fiduciary to deal with any challenge. You did not report whether or not you have fiduciary authority or responsibility.

[QDROphile]

Lest there be doubt about what I posted, I think the distribution should be denied whether or not you are cautious, absent clear written  administrative policies to the contrary.

[Gadgetfreak]

But a "disributable event" was triggered on day X (Date #1).

Date #2 is the date the participant mails it.

Date #3 is the date the TPA receives it.

I could see an argument that dates 2 and 3 don't even matter. Then again, I can see it the other way too. Absent any knowledge of intended fraud, I might ask an ERISA attorney but it seems reasonable to process the request.

[CuseFan]

6 hours ago, Gadgetfreak said:

I could see an argument that dates 2 and 3 don't even matter.

Disagree - by that reasoning the person could be rehired a year but because they had a previous distributable event you would still pay them out? If the person is employed by the plan sponsor (or control group member) when the distribution is paid then you have an in-service distribution subject to those rules. And the timing described sounds like a "oh, I'm getting rehired so I better get my 401k money out while I can" but oops, acted too late. We see people try to play these games in DB world all the time.

[Gadgetfreak]

I don't mind admitting if I am wrong but I wonder if there is any precedent or official regulation for this. We know that a Distributable Event allows for a distribution. But you are saying that you cannot receive a termination distribution if, at the time it is requested/received, you are employed back at that same company. I guess it comes down to what is the event?

a) Just the termination?

b) The termination + the sending of the paperwork?

c) The termination + the sending of the paperwork + the receiving of the paperwork?

d) The termination + the sending of the paperwork + the receiving of the paperwork + the processing of the distribution?

Is a TPA/RK looking back at the employment status on the actual day they process the distribution to make sure the EE wasn't rehired? I doubt it. So it can't be D. But then it is possible that they are processing a distribution for a rehired EE. And what about all the online distribution systems? The terminated participant requests the distribution. The employer confirms that s/he is terminated and approves the processing of it. There is no going back in every situation to confirm they aren't rehired.

That is why my initial thought is that the actual distributable even triggers the ability to get the distribution - again, absent any known fraud. But I am happy to be proven wrong. 

[QDROphile]

 If termination were the magic uncancellable ticket that allowed a distribution at any time thereafter, we wouldn’t have all the historical fuss about whether or not a termination is a valid termination because of the prospect of re-employment and whether the prospect of an expected rehire prevents the distribution. The point is that if the participant is employed at the time of distribution (or is expected to be re-employed within some “who knows what time” shortly after the distribution) a distribution can only be made under whatever in-service distribution rules apply. As I suggested in my earlier post, the burden should be on the participant in this situation, not the initial administrative functionary. If the participant is entitled to a distribution, the participant can make the case under the claims procedure with all of the reasoning and legal authority that the participant can muster, spelled out for consideration.

[duckthing]

21 hours ago, QDROphile said:

The point is that if the participant is employed at the time of distribution (or is expected to be re-employed within some “who knows what time” shortly after the distribution) a distribution can only be made under whatever in-service distribution rules apply.

Agreed, and I would be very surprised if the plan document doesn't address this clearly. The document almost certainly does not say that participants can be paid out "after a distributable event" or something along those lines. It's much more likely it defines termination distributions, or distributions after severance of employment, and then stipulates that those are payable only to terminated participants who have had a severance that ends their employment with the sponsor/adopting employer. (A rehired employee would not be a terminated participant and would not fall in this category.)

Our document specifically says "No distribution shall be made if the Participant is rehired by the Employer before payments commence" which is nice because it leaves no room for ambiguity!

[CuseFan]

Employed on annuity starting date = in-service distribution no matter how you slice it.