Hired back right away as a consultant

[scrinch]

After 22 years of employment with megacorp, it got bought out by MEGACORP. First thing they did was shut down our small local office, transfer a couple of people overseas, and lay off the rest of us. I was offered a job overseas or at a large regional office in the US, but I turned them down because DW and I didn't want to move for health/personal reasons. But MEGACORP decided they couldn't do without me, so my last day as an employee was on a Friday and my first day as a contractor was on the following Tuesday. I now work at home but report to the overseas office and travel there 4-5 times a year (I'm there now). I got a 4-month severance package when I terminated, and opted to cash out my slightly enhanced (change of control) qualified pension and roll it directly to an IRA. It all seemed fine...as FIRE is in the not-too-distant future.

Now here is my issue. I recently saw an internal e-mail from a HR VP in MEGACORP describing to their management why they were to NEVER hire back or hire on contract any former employee at a certain level or above in less than one year from termination. It described a scenario where the IRS could claim that the termination was not legitimate...they called it a sham termination...and then the pension rollover (possibly also the severance?) could then be deemed an "in service" distribution. This could then result in taxes + 20% surtax being immediately due on the rollover. The letter also claimed that in the extreme case the IRS could claim that this "disqualified" the pension program, and then everyone else in the program would owe taxes also. They claimed that this all stemmed from some legislation that passed in Fall 2004, I think. So because of this they were to NEVER hire employees back in less than a year. Does anyone know if this is in any way possible? Did I misread this e-mail, or am I skating on thin ice? If it matters, I used to be paid by MEGACORP, Inc in the US, but now I'm paid by a local MEGACORP subsidiary in Asia.

 

[Mr._johngalt]

After 22 years of employment with megacorp, it got bought out by MEGACORP. First thing they did was shut down our small local office, transfer a couple of people overseas, and lay off the rest of us. I was offered a job overseas or at a large regional office in the US, but I turned them down because DW and I didn't want to move for health/personal reasons. But MEGACORP decided they couldn't do without me, so my last day as an employee was on a Friday and my first day as a contractor was on the following Tuesday. I now work at home but report to the overseas office and travel there 4-5 times a year (I'm there now). I got a 4-month severance package when I terminated, and opted to cash out my slightly enhanced (change of control) qualified pension and roll it directly to an IRA. It all seemed fine...as FIRE is in the not-too-distant future.

Now here is my issue. I recently saw an internal e-mail from a HR VP in MEGACORP describing to their management why they were to NEVER hire back or hire on contract any former employee at a certain level or above in less than one year from termination. It described a scenario where the IRS could claim that the termination was not legitimate...they called it a sham termination...and then the pension rollover (possibly also the severance?) could then be deemed an "in service" distribution. This could then result in taxes + 20% surtax being immediately due on the rollover. The letter also claimed that in the extreme case the IRS could claim that this "disqualified" the pension program, and then everyone else in the program would owe taxes also. They claimed that this all stemmed from some legislation that passed in Fall 2004, I think. So because of this they were to NEVER hire employees back in less than a year. Does anyone know if this is in any way possible? Did I misread this e-mail, or am I skating on thin ice? If it matters, I used to be paid by MEGACORP, Inc in the US, but now I'm paid by a local MEGACORP subsidiary in Asia.

The concerns expressed in the "internal e-mail" are quite valid.

JG

 

[Martha]

I disagree with JG; I wouldn't lose any sleep over it, especially as you rolled the pension directly into the IRA. I understand the issue of "sham" termination, and how the argument could be made, but it seems like a very long shot to me. Plus, plans generally aren't terminated for this sort of thing as the effect is so severe on the participants. Employers worry about it because if they screw up their employees (or consultants in your case) would make a claim against the employer for the loss.

I would worry more if you made a claim that the termination was sham, that you are really an employee entitled to employee benefits.

 

[scrinch]

I would worry more if you made a claim that the termination was sham, that you are really an employee entitled to employee benefits.

Not a chance. I'm on the cool down part of the treadmill cycle. I'm not going to push a button and start it back up! I just want to terminate the contract in the same calendar year as I rolled over the pension if it has a real chance of costing me a big tax bill.

 

[Martha]

I really wouldn't worry too much about it.

 

[Delawaredave]

I wouldn't worry about it - the actions that Megacorp did (closing office, international relocations, etc) demonstrate that it was not a "sham termination".

I work for a Megacorp who had a lot of these termination / retirement situations where folks came back as contractors - never heard of issue.

There were limits on number of folks that could "contract back" - only because of the costs - and it was "too good a gig" for the folks that left.

Enjoy your "rampdown" !

 

[JohnEyles]

So my last day as an employee was on a Friday and my first day as a contractor was on the following Tuesday. ... describing to their management why they were to NEVER hire back or hire on contract any former employee at a certain level or above in less than one year from termination. It described a scenario where the IRS could claim that the termination was not legitimate...they called it a sham termination...

I had a somewhat similar (but not that similar) situation recently when I quit
my job with a Silicon-Valley high-tech company with an informal verbal agreement
that I would contract with them when it suited me and them. My termination was
entirely voluntary - I was tired of working full-time - and my contacting work is FAR
from being full-time. Also, there was no pension plan, other than partial matching
of 401K, and stock options and employee stock-purchase plan.

Nonetheless, they were extremely paranoid about this whole sham termination
thing, and I'm required to do my contracting work through an agency. This is a
double-edged sword (since my income is on a W2, not a 1099): the agency pays
the employer half of FICA/Medicare (which gives me roughly a 7% premium over
my negotiated hourly wage), but I have no Schedule C income and thus am
ineligible for health-insurance and other more creative expense deductions.
They also had gotten grief from the IRS over contractors who failed to pay
estimated taxes and owed massive amounts on their returns.

So perhaps it would make you and your employer more comfortable if you did
a similar thing and went through an agency ... but I'm inclined to agree with
the general don't-worry/be-happy sentiment here.

 

[Callie]

I worked for megacorp also, they tried to hire me back as contractor. they hired one of my colleagues - I would not worry.

 

[tryan]

I would worry more if you made a claim that the termination was sham, that you are really an employee entitled to employee benefits.

This is exactly what HR said when we tried to rehire a laid off employee. No reference to pension issues.

 

[UncleHoney]

We got a memo back in January. If you retire and are under 65 there will be no rehiring on a part time basis till you turn 65. Not even as a contractor working for someone else.

 

[MasterBlaster]

Scrinch:

Your concerns are real. The problem that you discribe is a real one in that qualified pension money paid to you may appear to the IRS as ongoing compensation. If you are doing pretty much the same job it still looks like you are still an employee.

The IRS may therefore rule (as you fear) that your pension it just ordinary compensation, disallow the qualified nature of the pension, and try to get income taxes on the rollover in the year in which it was paid.

The opinions on this forum that have been stated thus far are just that, opinions. Note that nobody has referenced actual IRS rulings.

 

[scrinch]

When I asked my CPA he said I "probably" didn't have anything to worry about. But this could add up to several hundred thousand dollars if there are penalties involved. The word "probably" makes me squeamish with that kind of money at stake.

If I terminate the contract in 2006, which is the same year that I terminated employment and did the rollover, do you think that would have any effect? The 1-yr contract expires at the end of January, anyway.

 

[Martha]

No, I don't think it will matter if you terminate the contract. What happened already happened.

Of course CPAs and lawyers are going to have to say you "probably" will have nothing to worry about. Almost everything we do has risk, lawyers and CPA can never say that you absolutely unequivacally have nothing to worry about.

 

[2B]

When I asked my CPA he said I "probably" didn't have anything to worry about. But this could add up to several hundred thousand dollars if there are penalties involved. The word "probably" makes me squeamish with that kind of money at stake.

If I terminate the contract in 2006, which is the same year that I terminated employment and did the rollover, do you think that would have any effect? The 1-yr contract expires at the end of January, anyway.

Keep in mind that you acted in "good faith" and did not request to be terminated. Megacorp II acted and you took the best of a "bad deal." If you ever get questioned, you were involuntarily terminated. You were surprised by being offerred a contract position. You would have been happier to have remained the loyal employee you were but you took the contract position to feed your family.

If the wheels fall off the wagon on this deal, you will have legal recourse to go after Megacorp II. You would probably be "made whole" because I doubt they would win. I think your risk is small although you might turned loose when your contract expires. Megacorp II is probably more worried about the legal, financial risk than you need to be.