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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.
Essentially, if no bona fide termination of employment occurred, then the individual did not gain the right to access the retirement funds. If an employee quits and cashes out his or her retirement plan, and then is immediately rehired, this could (in a worst case) place the tax benefit status of the entire plan in jeopardy. At a minimum, the individual would retroactively lose the tax benefits (with all related consequences) and the IRS may very well audit your organization’s plan, possibly imposing penalties for allowing the improper withdraw to occur.
Although a former employee could return at some point, there is no formula on how much time should pass. Circumstances might vary. For example, if someone quit to take another job, but was unexpectedly laid off after a few months, that person may be able to return because the circumstances should suggest that the separation was bona fide. However, if the employee intended to return at the time of resignation, the IRS is unlikely to view the situation as a true separation.