“We sponsor an ERISA 403(b) retirement plan. On occasion, we rehire retirees for projects and other work. Since they are typically rehired in a part-time, non-benefits eligible position, often for a fraction of their pre-retirement salary, they wish to continue their retirement distributions from the plan. However, since the plan does not permit in-service distributions, we have to deliver the bad news that they cannot take a distribution while employed.
“Could we amend our plan to allow in-service distributions ONLY for these rehired retirees? Or would we have to open up in-service distributions to all employees older than 59.5 for these former retirees to take distributions, which we would prefer not to do?”
Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
Great question. The Experts see two options here.
The first option, as you note, is to consider amending the plan to permit in-service distributions solely for these employees. For this path, we need to first look at when in-service distributions are permitted under Code section 403(b) and related regulations.
Although the rules differ slightly based on the investment vehicle and whether elective deferrals are to be distributed, in-service distributions could potentially be offered upon attainment of a stated age (including age 59.5), after a fixed number of years, or upon disability. See Treas. Reg. 1.403(b)-6 for a breakdown of permitted in-service distributions. In this situation, you could consider an amendment to permit in-service distributions after age 59.5 for rehires working less than a prescribed hours threshold. The caveat with this approach is that amending the plan to permit these distributions solely for rehired retirees could raise nondiscrimination concerns. Therefore, an amendment would need to comply with any nondiscrimination rules applicable to your plan.
The second option is to allow these individuals who were eligible to receive benefits as terminated employees to continue to be eligible for distributions upon rehire. Keep in mind that the rehire of employees who are receiving retirement benefits puts the focus on whether such retirement was a bona fide termination. This review would implicate a number of factors (e.g., length of separation, absence of an understanding at the time of separation and commencement of benefits if the employee will return to employment with the employer (in any capacity), etc.). See IRS Private Letter Ruling 201147038. While these considerations are implicated upon any separation and commencement of benefits where the plan does not permit in-service distributions, they are amplified when such employee is rehired. That said, where an employee commenced benefits after a bona fide termination, the employee may be able to continue receiving benefits upon rehire notwithstanding in-service distributions restrictions in the plan.
While we recommend discussing the implications of this approach with retirement plan counsel familiar with your plan, perhaps avoiding a suspension of benefits upon rehire would be another option.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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