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mehmgo

no longer a business and retired

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Does a plan need to be terminated since there is no longer a business and the solo owner is retired

and has no employees and takes no compensation but still has the plan

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You don't say what kind of business was the sponsor.

Was it a corporation, LLC, sole proprietor? 

All plans have to have a sponsor, trustee and plan administrator. 

So does it have all of these? 

Just because the owner doesn't work doesn't mean he got rid of the corporation and there are threads on this board where people discuss if a sole proprietor really ever goes out of business as long as the person is alive. 

So, I think more information is needed to fully answer you question. 

Although at some point all plans have to be formally terminated has always been my understanding.  You can read threads about the headaches having this person die and not leave anyone behind who is legally able to make decisions for the plan.  So some thoughts about how to terminate the plan and get the assets out ought to happen now it sounds like. 

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A profit sharing plan which has a complete discontinuance of contributions is de facto terminated.

It is debatable how this applies to a plan with a 401(k) feature, since contributions are elective, but in this scenario where the sole employee will not have any comp in the future, I would say it applies. So you already have a terminated plan, you just need to distribute the assets and file a final 5500.

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Is the question -

Does the plan have to be formally terminated in order to distribute assets?  (I'd say yes.)

or

Do all assets have to be distributed?  (I'd say no.)

 

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1 hour ago, C. B. Zeller said:

A profit sharing plan which has a complete discontinuance of contributions is de facto terminated.

Are you sure?  1.411(d)-2(a)(1) lists three circumstances that trigger 100% vesting, plan termination, partial termination and for a plan not subject to 412, complete discontinuance of contributions. 

For the OP, is a participant loan involved?  Otherwise, what advantage does the owner have in keeping the plan going after all business operations have ceased? 

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I re-read my comment and the responses - I did not mean to imply that the assets should be immediately distributed without formally terminating the plan. What I should have said was that since contributions are no longer recurring and substantial that the plan should be terminated asap, then assets should be distributed and a final 5500 filed.

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IMHO, the cessation of contributions (even if permanent) is not a de facto termination. That is why preapproved plans frequently contain an option to maintain any type of plan as a frozen plan, i.e., the plan that precludes new entrants and further contributions (or accruals). I would agree that the distribution of the last dollar of plan assets is potentially a de facto termination.

A plan that has permanently ceased contributions is often called a "wasting trust" and as such, continues to be an ongoing plan that must continue to be administered and updated as an ongoing plan and continue to make distributions to participants, for example, only upon distributable events as defined by the plan (such as retirement). The permanent cessation of contributions (whether declared by the employer or by the IRS) to a profit sharing plan is a de facto vesting event. The document usually has provisions built in with regard to the vesting.

If the owner wants to keep the money in the plan, then the employer has all the duties and fiduciary obligations of maintaining a qualified plan, and is expected to wear the fiduciary hat whenever appropriate, such as ensuring that all required interim amendments for ongoing plans are timely adopted and that the trust provisions are being carried out in a prudent manner (and the owner or someone needs to be a trustee). Since the withdrawal of all plan assets might constitute a de facto termination, the employer should act with caution before doing so (as a plan termination can accelerate the deadline for required interim amendments). The owner should be getting lots of good advice and making a decision one way or the other as soon as possible.

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A plan is not fully terminated until all assets are distributed.  The IRS requires terminations be formalized, including a date, determinations, and distributions.

Termination is not required.  You can keep going even if there are no contributions.  The plan still has to maintain and monitor the assets, follow notice and reporting rules, and make RMDs when the participant is 70.5.

It probably makes sense to terminate.  The admin and vendor fees for a plan, even a DC plan, will be higher than the admin fees for a low cost IRA.

 

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4 hours ago, loserson said:

Termination is not required.  You can keep going even if there are no contributions.

It should be pointed out that while you dont have to terminate, you do have to have "recurring and substantial" contributions.  

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It would take me a while to find it, but I seem to recall there is clear IRS guidance, e.g. a 1990 Rev. Rul.,  that such a plan must be terminated, in part because there is no longer an employer to amend it for law changes. I think that same guidance or some other guidance authorizes the sole proprietor's widow, if the sole proprietor passes away before the plan can be terminated.

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A plan must have a sponsor, but if this "retired" owner was ever a sole proprietor then I think it is well established that said proprietorship never really goes away, and could sponsor the plan.  

It probably makes sense to terminate and be done with it, but if there are illiquid or other non standard assets it might be easiest/least expensive to keep it going.  I have a few that are still going for no good reason, other than the plan seems to have taken on the spirit of an old friend.

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19 hours ago, RatherBeGolfing said:

It should be pointed out that while you dont have to terminate, you do have to have "recurring and substantial" contributions.  

Isn't the practical outcome of ceasing employer contributions that after years of neglect you have to 100% vest all participants?  Presumably the participant in a solo 401(k) was already fully vested.

Do you have to do special reporting when the employer neglects a plan or is it enough that the participants are all fully vested?

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On 6/21/2019 at 5:04 AM, mehmgo said:

Does a plan need to be terminated since there is no longer a business and the solo owner is retired

 

and has no employees and takes no compensation but still has the plan

Is there a specific reason for him to continue the Plan?

I know many years ago we had a client who maintained his 1 man Sole-Prop PSP long after he "retired" largely because he invested in 2nd deeds of trust and it was much cheaper to pay admin fees and document amendments than if was to pay an IRS trustee to hold non-traditional assets. We prepared and he continued to file 5500 under his sole-prop EIN. At some point in the "retirement" phase where he was not making contributions the Plan underwent an IRS audit that was no change. This was in the 90s if I recall correctly so at least at that point the IRS was OK with it.

If there is no need to maintain the plan I don't see why he wouldn't formally terminate and roll to IRA to get out of all the compliance work associated with a qualified retirement plan with amendments and 5500 filing requirements.

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17 hours ago, loserson said:

Do you have to do special reporting when the employer neglects a plan or is it enough that the participants are all fully vested?

1.401-1(b)(ii)  To be a profit-sharing plan, there must be recurring and substantial contributions out of profits for the employees. In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan.

This is a very old reg but is still on the books.

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1 hour ago, C. B. Zeller said:

1.401-1(b)(ii)  To be a profit-sharing plan, there must be recurring and substantial contributions out of profits for the employees.

As stated above, and I agree, the only consequence to not making such contributions is 100% vesting.

1 hour ago, C. B. Zeller said:

In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan.

Well that's...interesting.  I mean, isn't it the employer that has abandoned the plan?  Seems contradictory to abandon and report as abandoned.

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19 minutes ago, Bird said:

As stated above, and I agree, the only consequence to not making such contributions is 100% vesting.

I agree that for this plan it isn't much of an issue, but it could impact more than vesting for other plans. If the IRS determines that there has been a complete discontinuance, the plan is treated as terminated.  This relates back to the end of the employers tax year following the year of the last substantial contributionThe IRS also points out that they do not consider employee deferrals when looking at recurring and substantial contributions.   

Is it likely that the IRS will disallow non-substantial contributions or employee deferrals following a complete discontinuance?  Probably not, but I think its worth pointing out.

 

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4 hours ago, RatherBeGolfing said:

I agree that for this plan it isn't much of an issue, but it could impact more than vesting for other plans. If the IRS determines that there has been a complete discontinuance, the plan is treated as terminated.  This relates back to the end of the employers tax year following the year of the last substantial contributionThe IRS also points out that they do not consider employee deferrals when looking at recurring and substantial contributions.   

Is it likely that the IRS will disallow non-substantial contributions or employee deferrals following a complete discontinuance?  Probably not, but I think its worth pointing out.

My reading of that IRS page is that the plan must treat itself as terminated for purposes of vesting, but not that the IRS will treat it as terminated or force it to terminate.  The compliance unit identified plans that discontinued contributions and all they did was make them 100% vest, with no mention of forcing them to terminate and without any clear reference to special reporting or a dedicated Form.  It said some of them had to amend their 5500s, but with regard to vested participants, not to report as a discontinued plan and not to mark a 5500 as final.

So I read that as evidence suggesting the IRS does not, as a practical matter, require termination or even require extra reporting for plans that discontinue contributions.

Whereas this page makes it sound more ironclad that the IRS does not treat a plan as fully terminated until the termination date is set, the benefits/liabilities are determined, and the assets are gone.

Though for the original question, I think it will probably make sense to just terminate.

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