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401(k) Plan Termination


Guest Jane Freeman

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Guest Jane Freeman

I know that one of the options available when a plan terminates is to change the plan anniversary to the plan termination date which creates a short plan year. If this is done, there will most likely be a 2nd short plan year beginning the day after the termination date and ending at the end of the month in which the final distribution occurred.

We had previously been advised that a plan cannot have 2 short plan years in a row. I would like to know if anyone can verify that that is correct. My thinking was that the 2 short plan years in a row would apply to a plan changing it's plan year and that a plan that is terminating would be an exception.

Any input would be greatly appreciated.

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Isn't the plan termination date technically the last day of the last plan year?

You should definitely have cutoff reports as of that date showing value of assets, participants, etc. You don't have any more plan years after that for purposes of participation, vesting, allocations or accruals, etc.

The only purpose for which you have "plan years" after the date of termination is for 5500 filing purposes -- because you don't file until all assets have been distributed. I believe that most ignore the date of termination and continue filing using the old plan year end -- until all assets are distributed. I don't know if that is correct, but that is what I've seen done.

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Guest Jane Freeman

Thank you for the information. There is another situation relative to plan terminations that I would like to get an opinion on.

The plan termination date of a 401(k)/profit sharing contribution plan with a 12/31 anniversary date is 9/30/02. Distributions are expected to take place in 2003 (an IRS determ letter has been requested). The plan is top-heavy for 2002 (based upon the top-heavy ration at 12/31/01). Key employees made deferrals to the plan in 2002. Is the plan required to make a top-heavy contribution and if so, what period of compensation is it based upon?

Would the answer change if the final distribution was made prior to 12/31/02?

Thanks for your input.

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