Boardman Law Firm

Affiliate of the network
skip to content

Reading Room

July 15, 2008

FYI: Rehired Employees and 401(k) Distributions

By Cindy Van Bogaert

Here is your latest FYI: Employee Benefits Update from Cindy Van Bogaert, Partner and Chair of the Employee Benefits Practice Group at Boardman Law Firm LLP.

This FYI highlights problems with 401(k) distributions to employees who terminate from employment and then are rehired by the same employer. This is a troublesome issue for 401(k) plans because the rehire may indicate to the IRS that the termination from employment was not "bona fide" which means that the distribution might not have been allowed under the 401(k) rules. Because the situation is judged on a somewhat vague "facts and circumstances" standard, it can be difficult to assess whether a distribution to a rehired employee is in order or not.

Employers should consider the following steps:

  • If the employer knows about a rehire prior to making a distribution, review with counsel to determine whether a distribution is appropriate.
  • If the rehire is to occur after a distribution has been made, review the situation with counsel (preferably before the rehire date) to see what additional steps might be taken.

In my BenefitsLink 401(k) Q&A column, I recently addressed a question which provides more information about how a rehire affects the decision to make a 401(k) distribution.

Here is the link to the Q&A:
http://benefitslink.com/modperl/qa.cgi?db=qa_401k&id=75

Please contact me if you would like more information.

This FYI is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel. Nothing in this FYI is intended to be used, and no information can be used, for the purpose of avoiding penalties under the Internal Revenue Code, or promoting, marketing, or recommending to another party any transaction or matter addressed in this FYI.

If you have any questions or need assistance, please contact Cindy Van Bogaert at (608) 281-7543 or Email.

Would you like to have FYI: Employee Benefits Update sent directly to your e-mail inbox? If so, please send your request, with e-mail address, to Cindy Van Bogaert at Email.