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Practice Management

Rehiring? Check the Plan Documents

John Iekel

Sometimes the door doesn’t close on retired employees and it turns out to be a revolving door. A recent blog entry discusses what rehiring a former employee may spell for an employer and a plan, and steps an employer may want to take.  

In “Here I Go Again in the Plan…Treatment of Rehired Employees,” an entry in the Employee Benefits Law blog, Benjamin Gibbons, an Associate with Holland & Hart, argues that an employer that rehires a former employee who had participated in the 401(k) before he or she left the employer should review the 401(k) plan documents to see what they say about such employees. 

Gibbons suggests that the following are important considerations if an employer rehires an employee who had left. Much appears to hinge on whether the once-former employer is rehired within five years of their departure. 

Eligibility 

Generally, Gibbons says, a rehired employee will be able to participate in the 401(k) again immediately if he or she returns within five years and he or she was participating in—or was eligible to participate in—the 401(k) before leaving.
Credit for Years of Service 

The plan must give an employee who is rehired within five years credit for the years of service earned before having left the  employer.

Distributions 

If a rehired employee had taken a distribution from the 401(k) in connection with leaving the job, the distribution must be “bona fide” —which generally depends on the facts and circumstances surrounding the distribution. Gibbons writes that a distribution that comes after the employee left the employer without intending to return “is likely bona fide,” while a distribution to an employee who prearranged to be rehired later would not be.

Restoration of Forfeitures 

If an employee took a bona fide distribution, and that resulted in the forfeiture of a portion of the employee’s account, it is possible that the forfeited amounts could be restored. Gibbons adds that If the employee repays the distribution to the plan within five years of when employee’s left, the employer must restore the forfeited amount to the employee’s account with the plan.

A Caveat

Gibbons notes that in some cases, a plan’s terms might modify these general rules—which he argues emphasizes the importance of reviewing how plan documents address rehires.