Under the terms of most qualified retirement plans, distribution is available only upon separation from service (whether voluntary or involuntary) or attainment of a specified age. The possibility of rehire after such a separation from service can present real concerns.

The IRS becomes suspicious when participants quit their jobs, access their account balances and then get rehired. Even if nothing nefarious was intended, the IRS could deem the earlier “separation from service” to have been a sham. And if that happens, the distribution would pose a risk of plan disqualification.

Still, employers do sometimes find themselves critically short-staffed or in need of a particular skillset and looking to coax a former employee to return to active service in some capacity. When that happens, it is important to weigh the staffing need against the potential risk to the ongoing qualification of the retirement plan.

The IRS recently recognized that the COVID-19 pandemic has substantially increased the frequency with which rehire following a bona fide separation may occur. To help companies navigate such situations, it has published some question and answer guidance.

While it refers specifically to the pandemic, it may have broader applications as well.

The facts are these: A qualified pension plan (which does not provide for in-service distribution) has made or commenced distribution to an individual who experienced a bona fide retirement. Due to unforeseen hiring needs related to the pandemic, the plan sponsor rehires that individual. The question is whether the rehire will cause the individual’s prior separation to lose its status as a bona fide retirement.

The IRS advises that, although the determination of whether an individual’s retirement under a plan is bona fide is based on facts and circumstances, a rehire that is due to unforeseen circumstances that do not reflect any prearrangement to rehire the individual will not negate the characterization of the retirement as bona fide. It then illustrate by way ofthis example: If a public school district experiences a critical labor shortage that was unforeseen at the time of an individual’s bona fide retirement (and assuming the terms of the plan do not define bona fide retirement in a way which would preclude rehire), the prior bona fide retirement would not be adversely affected by reemployment of the individual to ease that labor shortage.

Clearly, this latest Q&A does little to alter the facts and circumstances test. The rehire may not be pursuant to any prearrangement, and the rehire should be based on circumstances that were unforeseen at the time of the retirement or other separation. Still, the new Q&A certainly suggests that the COVID-19 pandemic and its effects on the labor force may be significant factual circumstances that can shift the scale.

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