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Successor 401(k) Plans - correction thoughts


TPApril

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Small business was convinced by an advisor to start a new plan and the best way to do that would be to terminate the old plan rather than transfer assets. So they are both 401(k) and there is a successor rule issue that has been violated. Trying to come up with solution to fix. Can resolution to terminate first plan be revoked and 5500's amended?

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Some things cannot be fixed under conventional methods. If you have a clear line to getting it the way it would've been if the error had not occurred, you would document that process in a VCP submission to the IRS and get them to approve it. Not sure of the variables (e.g. did anyone take a distribution, is it retrievable).

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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It is the second plan that is at risk, not the first plan. Can you get VCP relief on the second plan if it is contingent on doing something that involves the first plan? Interesting question. I may give the VCP submission a shot but I would probably recommend it be done on an anonymous basis.

Also, to "stop the bleeding," think about freezing the second plan asap, and if it's been more than one year since the last dollar was distributed from the first plan set up a third plan to accept contributions going forward.

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Why is the second plan at risk rather than the first? The first plan made an improper in-service distribution. What failure occurred with respect to the second plan? I would be tempted to ask the IRS to approve a transfer from the IRA to the second plan, with whatever restrictions would apply to the transferred amounts as if the transfer had been from the first plan. For example, the transferred amounts would be subject to the 401(k) in-service distribution rules, not the distribution rules for rollovers. The effect would be the same as if there had been a plan merger as of the date of the original distribution. That would make the Form 5500 correction rather strightforward if the second 401(k) plan had an effective date no later than the original distribution date.

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My understanding is that if there is a violation of the 401(k) Successor Rule, it is both plans that would be at risk. Of course the greater risk is to Plan 1 since it likely has a larger balance. In this case, I guess the first plan was distributed lawfully, but would you say there is a risk to contributions going into Plan 2 within 1 year?

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I guess my concern is simply that there was a new DC plan set up within a year of a prior 401(k) plan. Even if in this case there is no risk to balance in prior plan, I am not clear that the exception says you can create a new plan if owner-only participant is over 59 1/2.

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I think you are referring to 1.401(k)-1(d)(4)(i). It says that plan termination is not a distributable event if the plan sponsor has an "alternative defined contribution plan". If the sole participant had a distributable event under a plan provision allowing in-service at 59 1/2, I agree with QDRO and don't see that you have a problem.

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