Distribution - ineligible?

Participant was hired in 2018 and was participating in 401k plan. He terminated in 2020, and then was rehired 2 years later in 2022. Since his rehire, he has been working on an as-needed basis. He receives a W-2 and is on payroll when working (not a 1099 employee). He took a full distribution from his account, even though he technically will still work on an as needed basis. Would he have been inelgiible to take his distribution? He wasn't working when he took it and he is not 59 1/2, so it couldn't be considered an ISW. Just curious if technically they could consider him terminated, and then rehired when he works? 

I would not allow a distribution after rehire in 2022 under the circumstances you described. I interpret the circumstances to be that he is expected to continue employment, although on again, off again. If there were not an expectation that he would be working again, maybe. Better yet that there be a solid expectation that he would not be working again. I would still worry about stated intent and expectation compared to the contrary inference from the pattern of working.

There is an IRS ruling on this.   I don't have the cite.  But the person has to be terminated.  If there was an agreement to bring the person back they weren't terminated.  

While not 100% I would look to other indicators of termination.  Did they send this person a COBRA notice for example?  If not, and normally a person in his position would have gotten a COBRA notice that points to this person not being terminated.

I would have recommend to a client to not pay a person as this fact set looks currently also.  

I think ESOP Guy is referring to this PLR:

1147038.pdf (irs.gov)

kimso, you did not indicate in your question what type of qualified plan was involved. If a defined benefit plan, then the Private Letter Ruling cited by EBECatty would be applicable, (disregarding for this purpose, that private letter rulings only bind the IRS And the requesting party and cannot be cited as precedent) even after its amendment by SECURE 1.0 (which allows for in-service withdrawals after age 59 1/2 and as amended by SECURE 2.0 (which allows certain distributions after attaining age 55 (if a service requirement is also satisfied)). If this is a 401(k) plan, Code Section 401(k)(2)(B)(i)(I) prohibits distributions of the participant's account balance prior to the occurrence of certain events, including severance from employment. Under the facts you have outlined, whether a severance from employment has occurred is a question of fact, and, in all likelihood, the answer would be No. By making a distribution to the participant at the time it did, the plan has an operational compliance issue and risks disqualification. Had the distribution occurred prior to the time of his rehire, then it would have been permissible and there would have been no compliance issue, even if he resumed employment. One other issue is whether the participant has resumed participation in the plan following his reemployment. 

I agree with the others about a future distribution, however, it seems you are asking if his prior distribution was compliant.  ("Would he have been inelgiible [sic] to take his distribution?")  If the distribution was taken prior to his rehire and at a time when there was no agreement that he would be rehired, whether on an as need basis or otherwise, the prior distribution should have been permissible. 

By implication, the distribution occurred after the 2022 rehire.  However, the date of distribution (ie, before or after the rehire) is unclear from the original post.