Everything You Need To Know About Rehiring an Employee That Has Been Paid Out of Their Retirement Plan Already

Having a quality employee that does good work and whom you can trust is an important asset and benefit for any business. Due to this, finding ways to keep quality employees, or get them to come back to work, can be advantageous. In some cases, you may want to rehire an employee that has retired.

While it can be good for your business to rehire a retired employee, it does add some complexities if you already pay out retirement benefits to this individual. In these cases, it is essential to follow certain steps, which otherwise could jeopardize the tax status of your business’s retirement benefit program. So, what are the rules for working after retirement?

No In-Service Payments

An in-service distribution or retirement payment is characterized as one in which a business will pay out a retirement benefit to an employee that is actively a member and employee of the company. If this occurs, it will violate various state and federal tax laws, which could jeopardize your overall retirement plan’s status. However, there are a few stipulations that can be met to allow a retired individual to return to the workforce and continue receiving retirement benefits.

Separation in Service

Can a company rehire after retirement? This is a common question. One of the factors that needs to be met to rehire an employee and continue to pay retirement benefits is that there must be a separation in service. Generally speaking, there must be a full calendar month between the end of employment and when the employee is rehired.

No Plan To Rehire When Benefits Are Taken

Another important factor to remember is that there cannot be a plan to rehire the individual if they are going to take retirement benefits. The separation in service between the employee and employer must be formalized using standard processes. There should also be no written or unwritten agreement that you will rehire the employee at a future date. At the time of the employment termination, there should be no expectation that employment will restart. This applies in all situations, even if the individual is going to take a different role, gets paid less, or only works part-time.

It is very important that all businesses and their employees carefully follow all rules and regulations surrounding the receipt of retirement income and coming back to work. Employers that do not meet these requirements could jeopardize the status of their plan, which could be very detrimental to all employees that will benefit from it in the future. Employees considering returning to work should also evaluate the pros and cons of doing so, including paying higher taxes or receiving reduced benefits in the future.