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Plan Termination and ADP/ACP Testing

Guest SWadd

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I am hoping that a poster could clarify a few questions I have regarding ADP/ACP Testing for a plan that terminates during their plan year.

First - my understanding is that a plan termination does not end the plan year unless there are specifics in an amendment/board resolution that states "the final plan year will end...". In the absence of such language, the test would be completed with the compensation for the entire plan year.

So, for example, if a calendar year plan terminates effective 9/30 however the company remains in business through the end of the year the compensation used for testing would be the comp for the entire plan year unless an amendment is adopting changing the plan year end. Is this logic sound?

Also, when does the clock start clicking to have corrective distributions removed from the plan if there is an ADP/ACP failure? Per Sal...

Treas. Reg. §1.401(k)-2(b)(v), which states that when a plan terminates, corrective distributions to pass the ADP test must be completed as soon as administratively feasible after the date of termination, but in no event later than 12 months following the date of termination of the plan. The same rule is stated in Treas. Reg. §1.401(m)-2(b)(2)(v) for corrective distributions to pass the ACP test. This lends some support to the idea that the plan year "ends" with the date of termination for testing purposes.

So, if a calendar year plan terminates 9/30 the clock starts 9/30 no 12/31. However, the last sentence seems to contradict my understanding that terminating the plan prior to the plan year end does not automatically change the plan year end to the termination date.

Any clarification on this would be greatly appreciated.

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You can always use comp from date of participation (well, unless you have a very poorly written document)

as of 9/30 no one is able to defer, so arguably everyone's date of participation has ceased and I'd hold you have a valid argument for only considering comp up until that date. Or another way of putting it, what if everyone switched from non-union status to union status as of that date? You would not use comp through the end of the year, only through 9/30 or the date they were eligible. I believe Sal's book gives examples of that type of scenario.

I suppose another possibility (?) would be to run a comp test using comp thru 9/30 divided by total comp.

if you pass the comp test, then arguablly you could use comp through 9/30 in testing, beacuse that would satisfy a definition of 414(s) - though I would have to look up in the regs if that would be a valid exclusion (using comp throug a point in time)

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perhaps in a similar vein, Q and A #3 from this years ASPPA conference

DC plan is top heavy and has a plan year ending 12/31. The plan terminates

on September 15, 2010. Normally, TH minimums are provided only if the

employee is employed on the last day of the plan year. (Assume that there

are salary deferrals during the year so that, if a top heavy minimum is

required, it needs to be made.)


(1) For the 2010 plan year, is 9/15/2010 treated as if it were the last day of

the plan year, so that only non-key employees who are employed on that

date are entitled to a TH minimum?

(2) If (1) is Yes, is the 3% minimum calculated for compensation from


(3) If (1) is No, is there NO top heavy minimum for the 2010 plan year

because the plan terminates before the end of the year (similar to the

concept that there is no money purchase plan funding if the plan terminates

before the end of the year and there is a last day employment requirement),

or does the plan have to wait to see who is employed on 12/31/2010 to

determine who is entitled to the TH minimum, even though the plan has

terminated before that date?

(4) Is the answer to any of the above affected by whether the employer

continues in existence through the end of 2010?

ANswer provided (emphasis mine)

1) Of course, if there is no employer contribution, there would not be an obligation to provide top

heavy minimum contribution. But, if there were contributions to keys during the year, including

elective deferrals, there is a top heavy minimum based on compensation and employment

through 9/15/10. Plan must liquidate within a reasonable time under Rev. Rul. 89-87 or else

9/15 date may not be reasonable. There is effectively a short plan year for top heavy purposes.

(2) yes

(3) n/a

(4) no change

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