What Is the Restoration of Benefits Provision in a 401(k)?

A restoration of benefits provision is a feature within some employer-sponsored retirement plans, such as a 401(k), that offers a specific opportunity to rehired employees. Its purpose is to allow a former employee who returns to the same company to reclaim employer contributions that were forfeited upon their initial departure. When an employee leaves a job, they are entitled to their own contributions and the vested portion of the company’s contributions, while any non-vested amounts are forfeited.

By repaying the funds they previously withdrew from the plan, the employee can trigger a “buy back” of the employer money they left behind. This is not a standard feature in all 401(k) plans; its availability depends entirely on the rules outlined in the specific plan document.

Qualifying for Benefit Restoration

Eligibility for the restoration of benefits hinges on meeting specific criteria related to vesting and forfeiture. For example, if a plan has a vesting schedule where an employee is 60% vested and they leave the company, they can take their own contributions and 60% of the employer’s contributions, but the remaining 40% is forfeited.

To qualify for restoration, two primary conditions must be met. First, the employee must have taken a complete distribution, or a “cash-out,” of their vested account balance after terminating employment. This action must be a “bona fide” distribution, meaning there was no prearranged agreement to be rehired at the time of the separation.

The second condition is that the employee must be rehired before incurring a “five-year break in service.” A break in service is a 12-month period during which the employee does not work a specified number of hours for the employer. If an employee is rehired within five years of their separation, they must be given the opportunity to repay their distribution and have their forfeited benefits restored.

Scope of Restored Benefits

When an employee successfully utilizes this feature, the plan restores the exact dollar amount of the non-vested employer contributions that were forfeited. This includes any matching funds or profit-sharing contributions the employee had not yet earned ownership of when they left the company. The amount restored is fixed to the value at the time of forfeiture and does not include any investment earnings or losses that would have accumulated on the forfeited funds during the employee’s absence. For instance, if an employee forfeited $10,000 in employer matching funds, the plan is only obligated to return that specific $10,000.

The employee’s own contributions are not “restored” through this process. Instead, the employee must first repay the full amount of the distribution they previously received, which acts as the trigger for the employer to reinstate the forfeited portion.

Initiating the Restoration Process

The first step is to formally contact the plan administrator or the company’s human resources department. The employee must communicate their intent to use the restoration provision, which begins the official process. Following this notification, the plan administrator will calculate and provide the exact amount that must be repaid, which is equal to the total distribution the employee received upon their prior separation.

The employee is then responsible for repaying these funds back into the plan. Acceptable repayment methods include a personal check or a direct rollover from another qualified retirement account, such as an IRA. The repayment must be completed no later than five years from the date of the distribution.

Once the repayment is completed and verified, the forfeited benefits are reinstated. These restored funds, along with any future employer contributions, will then be subject to the plan’s vesting schedule. The plan must credit the employee for their prior years of service, meaning the restored funds and new contributions will vest based on the employee’s total tenure with the company.