401(k) Plan Termination and Startup

[mlp0816]

Have a client who terminated the company 401(k) Plan and all assets were distributed by September of 2013. From pressure from his employees, he would like to now start a 401(k) plan back up again. Is there a time limitation as to how long he has to wait until he can start a 401(k) again?

[John Feldt ERPA CPC QPA]

To avoid "disqualifying" the distributions from the old plan, wait 12 months after all benefits were distributed from the prior 401(k) plan to avoid the successor plan rule.

[mlp0816]

Great... Thanks John

[Lou S.]

Yes. he needs to wait 12 months from the close of the other 401k plan to start up a new 410k plan. So no new 401(k) plan until October at the earliest.

edit - I see I'm too slow

[mlp0816]

Just to clarify Lou's response..... All assets were distributed by September of 2013. So the 12 month wait period was until September 30th 2014. So, they would have had the green light to start a plan up in October of 2014, correct?

[Lou S.]

yep. that's 12 months after final distribution so they would be good to go then.

[rcline46]

Would there HAVE to be a short year (if calendar) for all purposes? Because the plan could only be effective for 3 months?

[Lou S.]

Would there HAVE to be a short year (if calendar) for all purposes? Because the plan could only be effective for 3 months?

If you want the PYE to be 12/31 and the Plan to start 10/1, then yes there would be a short plan year. I'm not sure in this case you can retroactively adopt the plan back to 1/1 and still be considered to satisfy the 12 month rule. But perhaps someone else has direct experience with that.

[Tom Poje]

my understanding of the rules is no you can't have an effective date of 1/1 - the regs say if anyone was 'eligible' in the prior year 401k plan. so if the payout date was 10/1 the person was eligible through that date. Having an effective date of 1/1 for the new plan implies to me the person is eligible in the new 401k as of that date (even though not eligible to defer.

A plan is a successor plan (i.e., not a new plan) if 50 percent or more of the employees eligible under the 401(k) (or 401(m)) feature were eligible under another 401(k) (or 401(m)) plan maintained by the same employer in the prior year. The employer for such purpose is determined after application of the controlled and affiliated employer rules found in Code Section 414. [Treas. Reg. § 1.401(k)-2©(2)(iii)]

[mbozek]

Why cant the employer establish a 401k plan with a 1/1/15 effective date and allow deferrals to commence sometime in march so that employees would get benefit of a full year of comp being included?

Since 1/1/15 is more than 12 months after assets in prior plan were distributed there would be no look back issue.

[Belgarath]

Hey Tom - while I agree with not being able to date it retroactively to 1/1/14,I'm puzzled by the reference. Isn't that for prior year testing? I'd have said 1.401(k)(d)(4)(i) would be the successor plan reference?

Not that it matters - if it is established 10/1/14 or later, as detailed above, then shouldn't be any worries. Just curious as to whether I'm missing some important point.

[Tom Poje]

Belgarath -
I guess you type as well as I do, especially when referring to reg cites - I guess you refer to

1.401(k)-1(d)(4)(i) (you missed a number or whatever)
I simply pulled my reference from some material I had handy
your cite is valid, interestingly labeled
"Rules applicable to distributions upon plan termination - no alternative defined contribution plan"
my cite is labeled 'successor plans', which is probably why I found it vs your choice.

I think 'successor plan' is buried under prior year testing because the question came up "Can you use the 3% look back rule for the new plan"

somewhere buried in the ERISA outline as I recall is even an example with a 12 month wait, but I tripped across that one and can't find it.
in a plan advisor magazine reference I found the following

So, how does this rule work? Consider the following example: Employer A terminated Plan A (a 401(k) plan) on October 1, 2007, and completed distribution of Plan A’s assets by March 30, 2008. Employer A then established Profit Sharing Plan A on January 1, 2009. Is this permissible? No. Employer A’s actions violate Section 401(k)(10)(A) because it established a successor plan within 12 months after distribution of all assets from Plan A.

http://www.planadviser.com/MagazineArticle.aspx?id=7767

[Belgarath]

I don't type as well as ANYBODY. A stuffed monkey with rheumatoid arthritis types better than I do. And come to think of it, probably interprets the regs better, as well...

And yes, I missed the -1

[Phlyers]

Wanted to run a reverse example of Tom's: We have a new client who had profit sharing only with the entity they're winding up, wants us to terminate the plan.  Then is forming a new entity and wants to get a safe harbor non-elective with profit sharing in place by 9/1.   Because the old plan didn't have a 401k feature with deferrals needing distribution, the issue of whether the safe harbor may be a successor plan is irrelevant?  And, I don't need to track down ownership information on the old entity for controlled group 'same employer.'

[Tom Poje]

thanks for resurrecting this post and reminding me that Belgarath and I are lower than stuffed monkeys.

 

you might want to check http://www.julyservices.com/documents/Newsletter/TexP_2004Issue4_v3.pdf

the last paragraph on the first page under exceptions clearly indicates if terminated plan was profit sharing only you are ok

[Phlyers]

Thanks for the reply, Tom.  In my time searching these boards, you seem to be the authority; no monkey.  I had come across this article, but wanted to make sure nothing had changed since 2004.  I did some checking in the ERISA outline books, but some answers are a little scattered, therein.   

[Belgarath]

Yes, I don't think I'm qualified to be considered a higher primate. But tell me this - did you marry the gorilla your dreams?

[Tom Poje]

'I rang a tan' lady to propose, but she didn't answer the phone, so  the answer is no

[Belgarath]

Awful. Absolutely awful. I hope no one apes your proposal method.

[Tom Poje]

yes but at least you are only slightly below the level of ape.

this is about as far as I evolved.  a lower level, only useful in rare conditions

[Belgarath]

Atavism at its finest!