The IRS previously issued FAQs to explain the retirement plan rules of the CARES Act. The original guidance answered questions about expanded distribution options and favorable tax treatment for retirement distributions needed because of the coronavirus. In October, the IRS expanded the FAQs to include guidance on retiree benefits. While these new answers by the IRS relate directly to pension plans, they might be useful in administering a 401(k) plan, too.
When a defined benefit pension plan is established, employers have a choice to allow in-service distributions when an employee reaches normal retirement age or age 59½ and keeps working. If the plan is set up not to permit in-service distributions, the employee must have a bona fide retirement in order to begin pension benefits.
The guidance makes it clear that an employer can rehire the retired employee because of hiring needs that were unforeseen at the time of the retirement. This does not automatically cause the prior retirement to no longer be considered a bona fide retirement. Several things must line up to arrive at this welcomed result. The employee’s rehiring could not be expected or prearranged at the time of the prior retirement. The plan document should be referenced to confirm it does not define a bona fide retirement in a way that prevents rehire. While the guidance was stated in terms of defined benefit pensions, you can discuss with your trusted attorney how the same principles might apply to distributions from your 401(k) plan.
The second portion of the new FAQs makes clear that defined benefit pension distributions can begin while an employee is still working (for example at age 59½) as long as the plan document permits.