One of the many issues faced by may plan sponsors is determining a participant’s employment status. Terms vary widely: furlough, a layoff, reduction in hours, termination. Details of what actually took place matter for many purposes, including eligibility, access to certain withdrawal types, loans, and compensation. The key issue for many retirement plan purposes is whether there has been a severance of employment.
There is no punch list test to rely on, and the determination is largely based on “facts and circumstances.” Whatever guidance available is quite limited in nature, but the general themes are (1) there’s a mutual understanding about severance of employment; (2) individual is not treated as an employee for other purposes, e.g. employer is not continuing to pay for health benefits; (3) there is a reasonable expectation the person will no longer be performing any more duties with the employer.