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Partial Plan Termination / Statute of Limitations


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Employer filed a Form 5310 to terminate its 401(k) plan effective September 2014. Form 5310 was filed April 2015.

During the review process, IRS agent analyzed the data in question 16 (6 year turnover rate / non vested participants). Agent now takes the position that there was a partial plan termination in 2009 and 2010 and is requesting that all partially vested, terminated participants in those years be retroactively fully vested.

Assuming agent is correct that there was a partial plan termination in 2009 and 2010, would asserting a statute of limitations defense be viable? The 2009 and 2010 Form 5500s were both filed more than 3 years before the Form 5310 application. There is no question on the Form 5500-SFs that were filed asking about partial plan termination (i.e., the returns are accurate as filed).

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1. How much money is at stake? It could be cheaper and easier to just give in.

2. Anybody like to predict what the IRS would do in response to a refusal to grant the vesting specified for 2009 and 2010 based on an assertion that the relevant statute of limitations has expired? The IRS position is likely to be that failure to recognize that a partial termination had occurred is an operational failure. I don't remember there being a statute of limitations with respect to operational failures. Don't some VCP corrections involve having to go back for years and years?

3. The question is not whether the IRS could issue an unfavorable letter, but (I suppose) whether the sponsor could get it overturned in tax court. See #1 above in deciding how aggressively to not give in.

4. Does the agent's assessment of the prior pattern of termination as being a partial termination appear to be valid? If not, consider trying to get it bumped up to a higher level within the IRS.

Always check with your actuary first!

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4. Does the agent's assessment of the prior pattern of termination as being a partial termination appear to be valid? If not, consider trying to get it bumped up to a higher level within the IRS.

We just had a client go through a rather painful VCP. One of the issues what the plan's failure to offer annuity payments as an option going back to the early 2000's.

This agent's idea of a correction was to send letters to the all the effected people offering them a chance to pay back their benefits (once again some paid out over 10 years ago) and then they could request a distribution in the form of an annuity.

Her boss quickly killed that idea.

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4. Does the agent's assessment of the prior pattern of termination as being a partial termination appear to be valid? If not, consider trying to get it bumped up to a higher level within the IRS.

We just had a client go through a rather painful VCP. One of the issues what the plan's failure to offer annuity payments as an option going back to the early 2000's.

This agent's idea of a correction was to send letters to the all the effected people offering them a chance to pay back their benefits (once again some paid out over 10 years ago) and then they could request a distribution in the form of an annuity.

Her boss quickly killed that idea.

Theoretically, it would have been a legitimate approach to correcting the error. However, the chances that people would choose to avail themselves of the "opportunity" for the correction (especially those who would now have the chance to pay back a lump sum they received a decade and a half ago, with interest) would be very low indeed. It would just irritate them. Then you would have a whole bunch of prior participants who (a) had not been offered an option that should have been offered but which they would probably not have taken and who (b) are now irritated.

Always check with your actuary first!

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My 2 Cents I agree it is most likely the letter of the law when it comes to how to correct it. My first job out of college was with the IRS. I quickly learned there was letter of the law and there was realistic. Just to be clear I am not saying IRS agents should think of themselves as a law unto themselves but there were solutions back then I never proposed because they just weren't workable.

My point was some times talking to someone with a little more experience allows for a little more flexibility in finding a solution that protects everyone.

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