Jump to content

Participant Terminates, then is rehired in ineligible position -- is Participant eligible for Distribution?


Recommended Posts

This is in relation to a 403(b) Plan. 

We have an individual who was an employee and a participant in the Plan.  The individual had a termination of employment, at which time the individual was eligible for a distribution under the terms of the Plan.  The individual never took a distribution, but has since been re-hired by the employer, but in a position that is not eligible for Plan participation.

Since the individual is now an employee, is the individual no longer eligible for a distribution by virtue of his earlier termination (note: the individual is not eligible for an in-service distribution, so that issue is off the table)?

Would it matter if the individual were re-hired in a position classified or treated as an independent contractor or nonemployee? 

I realize the terms of the Plan will control a lot of the above, but I'm looking for more general guidance as to how this normally works or if there are any legal requirements that control, regardless of Plan terms.

Thanks to all!

Link to comment
Share on other sites

My guess you are correct the plan document is the main thing.

I am NOT much of a 403b expert but in a PSP, 401k, or ESOP my default answer would be no unless I find something very clear in the document that said otherwise.

All plan documents I have read make it clear you pay a terminated participant which isn't the same as an ineligible participant.  That is with the understanding you said there are no in-service distribution provisions.  

Link to comment
Share on other sites

Internal Revenue Code § 403(b)(7)(i) provides as a condition to § 403(b) Federal income tax treatment that “under the custodial account—(i) no such amounts may be paid or made available to any distributee . . . before— . . . (III) the employee has a severance from employment[.]”

Internal Revenue Code § 403(b)(11)(A) provides: “This subsection [§ 403(b)] shall not apply to any annuity contract unless under such contract distributions attributable to contributions made pursuant to a salary reduction agreement . . . may be paid only—(A) when the employee . . . has a severance from employment[.]”

Although either condition refers to “has a severance from employment”, these differ in how one looks to a measuring or other relevant time.

A rule interpreting the statute is 26 C.F.R. § 1.403(b)-6 https://www.ecfr.gov/current/title-26/section-1.403(b)-6.

About a situation in which a participant had a severance from employment with the charitable organization that paid contributions into the annuity contract or custodial account and later becomes an employee of the same charitable organization, several interpretations are possible. Among them:

Some suggest a participant may be allowed a distribution only while she “has a severance from employment”, and so no longer gets a severance-from-employment distribution if reemployed by the same charitable organization.

Some suggest a participant might be allowed a distribution to the extent of a separate subaccount of contributions made before the severance from employment, adjusted for gain or loss allocable to those contributions. That interpretation has some indirect support in nonrule guidance about allowing a distribution to the extent of a separate account for rolled-in amounts. See Revenue Ruling 2004-12, 2004-1 C.B. [2004-7 I.R.B.] 478.

Even if the plan’s administration ordinarily does not record separate subaccounts for a rehire, some might suggest a separate-accounting condition (if relevant) is met if the annuity contract or custodial account has received no contribution after the participant was rehired.

Allowing or refusing a distribution involves interpreting tax law, and how that law relates to an administrator’s fiduciary duties in administering the plan.

The plan’s administrator should get its lawyer’s advice.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

A number of years ago we had a plan where the workforce unionized, making most of the employees an excludible class.  Subject to attorney review, all impacted employees were deemed to no longer be eligible to share in contributions under the Plan.  Interestingly, they were also deemed to NOT have a distributable events, so the monies had to remain under the trust until the person satisfied a condition that allowed distribution.  (I also note that vesting continued to accrue provided that a vesting year was completed to allow for the credit.)  In summary, the effected participant received no further contributions, and their accounts remained under the trust until a distribution could be made.  Regarding the OP, the question appears to be can the person be paid now since a termination of employment was realized.  I would suggest no since the person is no longer terminated.  A distributable event must be realized, but until then the person's account just accrues investment return and vesting credits.  That was my experience with a similar situation.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

QPA, QKA

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...