Terminate today, get my money, and hire me back tomorrow……

[Guest Guest99]

Plan Info –

Pooled P/S

Balance Forward

Annual Valuation

10/31 year-end

Distribution Info –

Pay as soon as administratively feasible using prior valuation

Situation –

Employee decides he will terminate his employment effective Friday to receive a distribution from the plan knowing the amount will be more than that on the next valuation. Once the employee requests the distribution he will then have the company hire him back. Yes, unfortunately they will.

Is this OK? Any thoughts?

[jpod]

1. Very likely tax-qualification problems (i.e., plan not being operated in accordance with its terms) on the theory that there was no "bona fide" termination of employment; therefore, no bona fide distributable event under the terms of the plan. I am assuming that employee could not get an in-service distribution at this time or on the same terms; otherwise, why would he/she bother to "terminate"?

2. Also possible ERISA fiduciary breach issues.

[Guest Guest99]

No in-service dist. allowed.

What if the employee waited to receive the $ prior to being rehired? I see your point concerning a fiduciary breach based on the best interest of the part’s, but are they not operating the plan according to the terms if it states you will be paid based on the prior valuation as soon as administratively feasible? This has also been communicated via SPD.

[QDROphile]

Still not a bona fide termination. Also a fiduciary breach because the participant is robbing the plan of value, at the expense of other particpants.

A fiduciary has to be careful about value robbery even with bona fide termination. If the drop in value is material, the distribution should be postponed or a special valuation should be performed. The plan should be designed to provide for the delay or special valuation so the fiduciary does not have to stretch plan terms (what does "adminstratively feasible" mean? I would be tempted to read fairness into feasibility if the drop invalue were material). The more infrequent the valuation date, the more important it is to have safeguards.

[jpod]

1. If the termination was not bona fide, it shouldn't matter that the employee was paid out before being "rehired."

2. My fiduciary breach concern assumed that it was an impermissible distribution. Sorry I was not clear on that.

[E as in ERISA]

The concept of "break in service" is used more frequently in ERISA and the Code than termination (severance of employment and separation from service have limited uses, some of which are going away). But in today's world, you can't delay distributions until after a break in service....

[Guest Guest99]

You can't or you can delay distributions until after a break in service.

[E as in ERISA]

I think that legally you could delay distributions until after a break in service.

But participants might not be very happy about that.

[david rigby]

The original post stated:

"Distribution Info –

Pay as soon as administratively feasible using prior valuation"

Therefore, it seems unlikely that the plan administrator can unilaterally add a BIS requirement to existing account balances. My read of IRS Reg. 1.411(d)-4 Q&A1 is that the timing of distribution is protected.

http://www.access.gpo.gov/nara/cfr/cfrhtml...26cfrv5_00.html

[davef]

This termination/rehire issue was discussed in a 2000 Information Letter from the IRS (#2000-0245). It was summarized in EBIA's 10/26/00 weekly on-line newsletter. Basically, the IRS said that if there was no bona fide separation from service, the plan (a 401(k) plan) could be disqualified. If anyone wants a copy of the letter, I can fax it to you.

[jpod]

I think that letter dealt with the old 401(k) statutory language, i.e., "separation from service," and noted that a termination of full time status and reemployment on a part time basis was not a "separation from service," within the meaning of the statute.

However, my reponse to the origiinal post assumed that we were not dealing with 401(k) statutory issues, but simply that the profit sharing plan by its terms linked distributions to "termination of employment," or some language to that effect. I think the IRS would say that if your plan has a termination of employment requirement, it is implicit that the termination must be "bona fide," and you would have an operational defect if a distribution is made on account of supposed termination that was less than bona fide. The fact that the employer and the employee are, before the fact, talking about her/him being "reemployed" suggests to me that there would be an issue as to whether the termination is bona fide.

[davef]

I agree. The letter dealt with a person who retired from a full-time position and was rehired as a part-timer. The IRS pointed out that the underlying issue was whether a bona fide separation from service would occur where the employer and employee had discussed the re-hire arrangement before the person retired. While the IRS could have been more direct in coming to its conclusion, it did cite some other sources where the rehire was not initially contemplated, and which was considered to be a separation from service.

[david rigby]

IRS Information Letter 2000-0245

http://www.irs.gov/pub/irs-wd/00-0245.pdf