shERPA Posted January 23, 2021 Share Posted January 23, 2021 So, how much of a thing is this? An employer used to have a bunch of employees. They changed things up in 2020 and all the employees are now gone, just the married couple owners who are left. In 2021 they want to start a plan. Reading the reg and Example 1 would imply that setting up a plan would be discriminatory timing. So are they just SOL and can't have a plan? Not ever? Assuming they want to do a 401(k)/PS. The former employees have no compensation in 2021, so their 415 limit is zero. How does that work? Or if they want to do a DB? I suppose a DB could grant benefits to former employees, but with no current year annual additions possible a combo won't work. And how many former employees and how many years where this is a problem or it goes away? Or is this reg so unworkable as to not really be a thing? I carry stuff uphill for others who get all the glory. Link to comment Share on other sites More sharing options...
Mike Preston Posted January 23, 2021 Share Posted January 23, 2021 I think it goes away in 5 years. Anything before that requires an erisa lawyer. Link to comment Share on other sites More sharing options...
FORMER ESQ. Posted January 24, 2021 Share Posted January 24, 2021 Your fact pattern is just too close to Example 1 in the 1.401(a)(4)-5 Treasury Regulations. Of course, the determination is made based on all the facts and circumstances. Link to comment Share on other sites More sharing options...
shERPA Posted January 24, 2021 Author Share Posted January 24, 2021 Yes, it’s really close to Example 1. This situation seems to come up frequently and I’ve always been leery because of Example 1. I carry stuff uphill for others who get all the glory. Link to comment Share on other sites More sharing options...
Bird Posted January 25, 2021 Share Posted January 25, 2021 Wow, that's never been on my radar in the circumstances described. Example 1 is where there was an ongoing plan, and then is amended after everyone else is gone. I don't know how you can discriminate against someone who is not an employee (and was never covered by the plan). I get that the example has some similarities but in my mind it is loosely akin to the question of vesting for employees term'd prior to plan termination, where you have to look at whether their terms were part of that event or not. Kind of looking at the overall history of the plan. Luke Bailey 1 Ed Snyder Link to comment Share on other sites More sharing options...
C. B. Zeller Posted January 25, 2021 Share Posted January 25, 2021 I think the fact that Example 1 talks about a defined benefit plan makes it irrelevant in this situation. As you pointed out @shERPA the 415(c) limit means any former employees would not be eligible to receive an allocation under a new DC plan. In profit sharing plans (including 401(k) plans) benefits are always determined on a year-to-year basis. I can't see any rationale for taking former employees into account. If we were talking about a defined benefit plan, then maybe there is an argument to be made but I think it's still a stretch. Especially if it's a cash balance plan where benefits are not typically based on past service. All in all, I think this reg exists to give the IRS a way to go after people who engage in abusive transactions; as long as there is a legitimate business reason for the changes in employee population and plan benefits, I doubt you would have much to worry about. Luke Bailey 1 Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance. Corey B. Zeller, MSEA, CPC, QPA, QKA Preferred Pension Planning Corp.corey@pppc.co Link to comment Share on other sites More sharing options...
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