I've been reading a lot of very informative posts about employees "sham" quitting to receive a distribution and then being rehired shortly thereafter, but I haven't seen an answer to the question that has come up for me...I'd love to get your thoughts.

A participant terminates employment from a 401(k) plan and elects to take her distributions in installments. Several months later, shortstaffed, the employer hires her back in a part time position. The TPA is not notified and payments from the account continue to the participant. (You may assume that the termination and rehire are bona fide.)

The Plan has a provision that suspends installment distributions of elective deferrals, QNECs, QMACs and Safe Harbor distributions upon rehire, but is silent on the issue of whether installment distributions of other amounts (such as Employer discretionary distributions) are also suspended. No in-service distributions are permitted under the Plan.

The TPA recently became aware of the situation and now claims that all distribution installments made to her were in violation of the plan terms and must be paid back. The participant is devistated as she's been using the money for her living expenses and can't possibly come up with the repayment.

What should have happened upon this participant's rehire? Are the amounts already provided to her really "overpayments" that must now be recontributed to the plan?

Just an thought: what is meant by "part-time"?
For example, if EE works 10 hours a week, does the plan suspension language apply?
If it does, could the plan be amended to be more generous for part-time rehires?

Is this a plan language interpretation question? If it is, and the TPA is not a fiduciary, the TPA's conclusion is not the controlling conclusion. The plan should say who interprets plan terms.

I apologize that I didn't respond sooner. That's the conclusion that we ended up coming to also...that continued payments were not disallowed under the law, so that it was only the interpretation of the document that controlled.

Thanks for your insights!