If your qualified pension plan does not provide for in-service distributions and has commenced benefit distributions to a retiree who experienced a bona fide retirement, the IRS says your plan may be able to rehire that retiree and let him or her continue to receive benefit payments upon rehire.

There is no explicit definition of what constitutes a bona fide retirement. Generally, this determination is made based on the facts and circumstances surrounding the retirement. The determination of whether there was a bona fide retirement is important because for plans that do not permit in-service withdrawals, the IRS requires there be a bona fide retirement in order for the retiree to begin receiving retirement benefits. If this rule is violated, the plan could be disqualified. So, for example, if both the employer and employee knew at the time of the employee’s retirement that the employee, with reasonable certainty, will continue to perform services for the employer, a bona fide termination of employment has not occurred. Therefore, benefit payments should not commence for this individual.

However, a rehire due to unforeseen circumstances that do not reflect any prearrangement to rehire the individual will not cause the individual’s prior retirement to no longer be considered a bona fide retirement under the plan. Consequently, if plan terms permit, benefit distributions could continue after the rehire.

Because many plans have adopted language that place certain restrictions on rehiring employees and/or language regarding when benefits will be suspended upon rehire, plan sponsors, who want to allow benefit payments to continue after rehire, should carefully review and amend their plans as needed.