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Successor Plan Sources


Vlad401k
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Hey,

 

I had a question regarding successor plans. Let's say a company terminates a plan and immediately starts a new successor plan. What would happen to the sources (deferrals, Safe Harbor, match, etc.)?

 

I believe the deferrals and Safe Harbor sources would have to be directly transferred and still be treated as those same sources in the receiving plan (subject to the distribution rules applicable for deferrals). However, what about the discretionary match and profit sharing? Would those be transferred as the same sources or would they be treated as a rollover? Would a 1099-R have to be issued for the discretionary sources, but not for the deferrals and Safe Harbor contributions?

 

The thinking is that when there is a successor plan, the discretionary sources can be distributed, so just wanted to know how they should be treated if transferred to the successor plan.

 

Any help would be appreciated.

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I don't work on 401(k) plans, but if a 401(k) plan terminates, wouldn't all of the money have to be PAID OUT (either through direct distributions or rollovers)? 

Granted that the successor plan would have to continue to recognize prior service for vesting service etc., the successor plan would start with $0 assets other than amounts rolled over from the prior plan.  The roll over assets would only have the status of being roll over balances, and it would matter not a whit how the money had accumulated under the prior, now-terminated plan.  Is that not so?

1099-Rs would have to be issued for every penny that had been in the now-terminated plan, but those portions that were directly rolled over to the new plan or to an IRA would be designated as not currently taxable.

Or am I missing something?

 

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The issue is that under 1.401(k)-1(d)(4)(i), deferrals can not be distributed upon termination of the plan if the employer sponsors an "alternative defined contribution plan".  SH non-elective and SH match are QNEC's and QMAC's respectively [1.401(k)-3(b)(1) and 1.401(k)-3(c)(1)], which are subject to the same distribution restrictions as deferrals (see their definitions in 1.401(k)-6.)  So, in the situation Vlad describes, the deferrals and SH can not be distributed and must be transferred to the alternative defined contribution plan.

 

For the other contribution sources, it would depend on how things are done.  If the old plan is merged into the new one, there would be no distributions.  If the old plan is terminated, they probably could. Their treatment in the new plan would depend on how the funds got there. They would only be a rollover if the participants had the option of receiving a distribution.  But, what you are describing seems like a lot of trouble to get in-service distributions of the PS and regular match sources, when you could just amend the existing plan.

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  • 2 weeks later...

Thanks, Kevin C. That was very helpful.

 

I have another question about successor plans. What about loans? Let's say the loan is made from the deferral source and then the employer creates a successor plan. What happens with the loan? My thinking is that it must be transferred to the successor plan because it's technically from deferral source. What are your thoughts? What if the successor plan does not want to allow loans?

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