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Rehired Employees: Navigating the Eligibility and Vesting Guidelines in a 401(k) Plan

In the current climate characterized by labor shortages, organizations are increasingly opting to rehire former employees. These employment circumstances give rise to a crucial question: How should rehired employees be integrated into the organization's 401(k) plan, particularly concerning eligibility and vesting? We elucidate some of the key considerations for employers and rehired employees.


Key Considerations for Eligibility

If an employee is rehired within a five-year period following their original severance, and if said employee had participated in—or was eligible to participate in—the company's 401(k) plan, then the individual is eligible for plan participation immediately upon rehire or as of their original Plan Entry Date, whichever is later. It is pertinent to note that specific plan terms may yield additional eligibility conditions.


Crediting Prior Eligibility and Vesting Tenure

For employees rehired within a five-year timeframe after their initial employment termination, the years of service completed during the original employment term must be credited under the current 401(k) plan. This recognition ensures that rehired employees are not unfairly disadvantaged when it comes to their retirement benefits.


Assessing the Bona Fides of a Plan Distribution

If a rehired employee had previously taken a distribution from the 401(k) plan in association with their employment severance, the legitimacy—or "bona fides"—of the distribution is subject to scrutiny. Generally, a distribution is considered bona fide if, at the time of severance, there was no prearranged plan for the employee to be rehired. Conversely, distributions occurring under conditions that involve a prearranged plan for rehire are not deemed to be bona fide severances of employment.


Restoration of Forfeited Amounts

When a rehired employee has received a bona fide distribution that led to the forfeiture of a portion of their plan account, an opportunity exists for the restoration of these forfeited amounts. Specifically, if the employee repays the original distribution amount to the plan within five years following their employment severance, the employer is obligated to restore the forfeited sum to the employee's plan account.


Consulting Your TPA on Eligibility and Vesting for Rehired Employees

The above guidelines are general in nature and may not necessarily align with the terms of your specific 401(k) plan. It is incumbent upon both employers and employees to consult their Third-Party Administrators (TPAs) for clarification on issues related to eligibility or vesting concerning rehired employees.

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