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Partial termination


Cynchbeast

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We have a calendar year PS with Y/E requirement for contribution.  Owner is selling his (veterinary) practice to another larger company - probably by mid-October; he intends to keep his corporation active and he and his wife will remain on payroll.  All other employees will be moving to new company and probably rolling their money into the new company's 401(k) plan.   He wants to make a 2017 contribution and has already deposited most of that money.  What we want to do is a mid-year valuation in which we allocate Profit Sharing and earnings.  This would probably be 09/30/17 or whatever they select as official termination date for participants.

I need to determine what documentation we need in order to accomplish this.  We need to address partial termination as well as mid-year valuation ignoring year-end employment requirement.

 

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Just off the cuff without really thinking about it...

You may not need any documentation - a partial plan termination means that every affected participant becomes 100% vested. No documentation needed for that.

Does the employer intend to contribute to everyone, or only those who MUST receive a contribution? Reason I ask is that obviously you will fail coverage with a last day requirement. So, the plan may have "fail-safe" language which mandates the specific process of who gets a profit sharing allocation, up to the point that coverage passes. If so, then in order to give an allocation to everyone, the plan will need to be amended.

Plans typically contain language allowing for valuations, other than on specified dates, for any date deemed necessary or appropriate, etc. by the Administrator, so you are probably fine there.

These are just terminated participants - it isn't yet a PLAN termination, so unless there is a big rush, why not just wait and do a normal 12/31 valuation? Why do two? Just a thought.

There are likely other issues - as I said, this is just a quick bunch of random thoughts.

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Spend time thinking about the termination amendment.  Way to often people give it little thought and then they come on this board saying the plan is terminating what do I do in this or that situation.  The best answer often times was spend time drafting a better termination amendment.

Ask things like when are people going to be fully vested?  Should it include someone who quit a few months ago?

Are we going to file for a D Letter on the terminations?  If so, do we want to allow at least partial payments before we get the D Letter with a final later?  If so, does the amendment need to reflect that fact?

Is it really clear what compensation you are going to use for this 9/30 allocation?  The owner might get comp after that date but the employees won't.  Do you want to or can you even use that comp? 

My point to stop and think of the issues/problems/questions that might come up while doing the work and see if the amendment needs to account for those factors. 

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Thank you for the responses.  To Belgarath - very good points - which I have been pondering.

  • Re contributions, the owner does want to give the contribution to everyone who would otherwise be eligible, so the the fail-safe language won't work.  So I think we will have to amend the plan to remove year-end requirement.
  • Re rush - yes, there is sort of a rush in that the owner wants to allow these people to rollover their money right away and be done with it.

I am going to re-confirm with owner that above is what he wants because I agree that the easiest thing is to just wait until 12/31 and remove the year-end requirement.  We know that it really makes no difference if participants have their money in the old plan or the new, but on the other hand the new plan is a 401(k) where they would have control over the investments (existing plan is pooled PS).

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