Crediting service of rehired participants.

[traveler]

I have a client with a defined benefit plan that has a 5 year graded vesting schedule. There will be a partial termination with respect to a group of employees who will be fully vested. Most of these individuals will take a lump sum distribution of their full accrued benefits. If one of these participants is subsequently employed at a different location and again becomes a participant of this plan, do years of service prior to the break count towards vesting in the benefit accrued after the break?

For example, an indivual who had 2 years of service became 100% vested because of the partial termination. 4 years later he is rehired and participates under the same plan. Under 411(a)(6) it does not seem that this pre-break service can be disregarded, even if the break were more than 5 years since he was fully vested before he left.

The cashout rule of Reg. 1.411(a)-7 does not seem to help either.

Seems like I must be missing something, because it is burdensome to have to keep track of prior participants just so one knows whether or not to credit prior service.

Any thoughts would be appreciated.

[richard]

Be careful. Depending on how the plan is written and how the law operates, the rehired employee might get a windfall.

I've seen it in the following situation.

The former employee who was paid out his lump sum had the right to "buy back" his old service by paying back to the plan the amount of his lump sum, plus interest -- with interest at a rate of 5% per year. Worse, the former employee might have until 5 years after his subsequent termination of employment (that's right) to do so.

This was particularly valuable to the former employee since the plan was a final average pay plan (it would be even more valuable if benefits had been improved in the interim).

It was not clear how much of this information (i.e., the option to buy back his benefit or how truly valuable this was) was actually presented to the employee; that was up to the plan sponsor. It, as usual, was not contained in the SPD.

[KJohnson]

I haven't gone back and looked at the regs, but I think thatthe service could be disregarded for benefit accrual purpose under 411 even if you have to consider it for vesting. Also, I don't think you would have to offer a repayment option since they received 100% of their accrued benefit at the partial termination.

[RCK]

I agree. The plan only has to offer repayment rights to participants who were less than 100% vested when terminated.

On a slightly different note, we came to this conclusion: that the original distribution is taxable. The repayment must be made with post-tax dollars, and the subsequent distribution is still fully taxable.

[traveler]

Thanks for the responses. The plan does not have a buy-back provision because of the normal 5 year cliff vesting provision. With no buy back provision, its seem that 411 would not allow one to disregard the prior service for vesting purposes, even if the participant received a 100% distribution of his accrued benefit.