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terminating a Money Purchase plan


Guest biener

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Guest biener

Small business with 10 participants in a MPP, 7 highly compensated persons hitting the 52k mark. Want to terminate the MPP and start a new 401k using another low cost provider (currently using bank for MPP with high fees). We DO NOT want to convert to a 401k but rather terminate the MPP and start new 401k on 1/1/15. Question: Can some persons still keep money in the MPP or do you HAVE to roll it over into an IRA or the new 401k? Thanks in advance.

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Termination of the plan requires that the plan assets all be distributed from the plan within a reasonable period after the formal date of plan termination. The IRS says 12 months or less is a reasonable time frame to distribute. Be sure the proper steps are taken to freeze and terminate, and then file the final 5500 after all assets are paid out.

Consider the pricing for the new plan. A startup with zero assets tends to have a higher record keeper fee and/or a higher investment advisor fee than a plan that starts up with existing assets. If you establish a 401(k) plan and merge in the MP assets, you could probably negotiate a lower fee for the investment record-keeper/advisor.

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Guest biener

Thanks for the input. We want to leave the high cost current MP fiduciary and move to a new 401k low cost provider (and they are very low cost). I will be moving my MP monies to the new 401k. Some will move to an IRA. But I was curious if the MP plan could remain in effect, just no more contributions?

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John don't forget, yf they merge in the MP they need to keep the J&S requirements (and other distribution characteristics of MP money) on those assets, some folks don't want that.

Biener, if you want folks to be able to take distributions, you need to terminate and distribute - sort of all or nothing. If you freeze, then you need to leave ALL the money in the plan, continue to maintain document, continue to file 5500s. Virtually no active participants would be able to roll out of the plan in that case because MP plans have very strong restrictions on taking in service distributions before the later of NRA or age 62.

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Understood, but usually the J&S requirements are not that big of an issue.

A good point to mention though was the in-service age -- if you merge the MP into the 401(k), make sure the normal retirement age is not less than age 62. I am assuming the MP plan has a normal retirement age that is already age 62 or older. If not, you must have data that supports the lower age as being typical for the industry.

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Biener says the selected 401(k) provider is "very low cost". These are usually the ones who have no processes in place to deal with QJSA and other pension plan distribution options/restrictions, so this needs to be investigated before effecting any sort of merger or employer-initiated transfer from MP to 401(k).

I carry stuff uphill for others who get all the glory.

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"Very low cost" can also mean very little service. Make sure you understand what parts of the administration they do and do not provide. For example, determining eligibility, calculating the match and/or profit sharing allocation, ADP/ACP testing and other testing... Your level of involvement in the plan administration will make a big difference in how much of your time is occupied with plan issues. As they say, time is money. You should also look at what services they provide in the case of an IRS or DOL audit or if plan corrections are needed.

"Very low cost" can also be mistaken for "very low direct charges". Make sure you understand the fee disclosure the service providers are required to provide. Pay particular attention to revenue sharing. If the disclosure they provide isn't easy to understand and read, ask for another one. They are required to provide you a disclosure that is readable.

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I am terminating a money purchase plan for a hospital. The plan invests in TIAA-CREF annuities and annuities with another insurance company. Since this is a money purchase plan, we have to offer the life annuity to single particpants and the QJSA to married particpants. If the Plan assets were invested in mutual funds, etc. the particpatns would chosse between cash or distribution of an annuity contract. We would use the particnat's account balance to pruchase a deferred annuity. We are being told that TIAA-CREF and the other insurer don't have deferred annuity products. However, it is impossible to elect lump sums from many of their existing contracts. TIAA-CREF suggest thta we can just distribute existing certificates to particpants, but I am not sure that satisfies the requirments for a 401(a) plan (it suffices for 403(b) plan terminations).

The only thing that i can think of is have all particpants (even retirees in pay status) make an election for cash (if permitted under their contracts) or distribution of their benefits in kind in the form of qualified plan distributed annuity. See Treas.Reg. Section 1.402©-2, Q&A 10.1.4029a)-1(a)(2).

Any thoughts? Obviously there are thousands of tax-exempt employers out there who have money purhcase plans with TIAA-CREF as a vendor. Some of those plans are being terminated.

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I can't help with the TIAA-CREF part of your question, but based on my experience, it would be very unusual if you have anyone elect an annuity. In the 21 years I've been working with DC plans, our office has never had anyone elect an annuity from a DC plan.

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The problem is that TIAA-CREF does not permit lump sums for accounts invested in TIAA traditional annuities, so no one can elect a lump sum if he/she has this invesment and we will need tp purchase annuities. There is no way to terminate the contracts with surrender charges, etc. Once you are in a TIAA traditional annuity, then you are stuck.

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TIAA-CREF suggest that we can just distribute existing certificates to participants ...

Wouldn't that be an in-kind lump sum distribution? If someone does elect an annuity, it sounds like you are stuck. I would not want to be the fiduciary who made the decision to put investments in the plan that do not allow the distribution options provided by the plan.

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I agree, but virtually every college and university in the country invests with TIAA-CREF. DOL is aware of the problem and has infomally said if you are stuck, then distributing certificates may be the prudent thing to do. At least, TIAA-CREF has high ratings from AM BEST etc.. Although i have this issue in a terminating plan, it is an ongoing problem; plan fiduciaries can't move investments from TIAA traditional annuitites if they want to add a different investment option. in addtion, TIAA-CREF issues indivdual contracts to particpants so the participants have control (except they can't get their $ out of TIAA traditional annutiies either).

When we draft plans with TIAA-CREF investments, we have to include language stating that the disitribution options (ohter than required QJSA etc.) are those permitted under the annuity contract.

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