If an employee resigns and cashes out his or her retirement plan, then reapplies for the same job, can we rehire that person?

Rehiring that person to the same job would likely create liability for both the individual and your organization. The Internal Revenue Service (IRS) has strict rules on when an individual may withdraw funds from a retirement plan such as a 401(k) or 403(b), such as hardship withdrawals. Obviously, an employee who resigns may also choose to cash out the plan. However, if that person returns to the same job (and intended to return), the IRS will view this as a “sham” separation. The potential consequences are the same as if you allowed a current employee to cash out his or her funds.