My employer allows people to quit their job for the sole purpose of cashing out their 401K and get the employer and employee contributions; as well as their vacation pay. Once the disbursement is made, they are rehired. All of their benefits are bridged except the 401K the employee has to reapply for this. I know that this is not a smart thing to do but are there any consequences to the 401K plan when you tell employees that you can do this?

Biggest consequence from cashing out a 401k early comes from the IRS... there are penalties and taxes for withdrawing too early. 401k is meant for retirement. Not to take out as you like. Talk to the plan administrator that the plan is through. I've never heard of a company doing this.

This sounds crazy. There is no need to terminate employment to cash out a 401K. If you cash it out, you will still incur the 10% penalty and the tax liability.