Leaderboard

The employees can't be considered to have terminated employment. However, their 401(k) plan can be terminated. At that point, they will need to take a distribution which they can roll over to the 403(b) plan if they want to. There is no rule that prohibits a rollover of an amount obtained on a plan termination to another plan of the same employer. Code section 401(k)(10)(A) and Treas. Reg. § 1.401(k)-1(d)(4)(i) provide the rule that you can't terminate a 401(k) plan and distribute assets if you have an alternative plan. However, Treas. Reg. § 1.401(k)-1(d)(4)(i) specifically provides that a 403(b) plan is not an alternative plan for this purpose.

Correct. The only reason notices were eliminated for the SHNE is because employees did not need to do anything to receive those contributions, and the powers that be finally came to their senses after years of having to notify participants that they were getting 3% in the coming year (again) whether they contributed or not. Since matching contributions require employee deferrals, annual notices make sense - otherwise, how many doctor/owner plans would you see where "strangely" it was only the doctor with deferrals and safe harbor match?

shERPA - the cynic in me says the IRS will say that such publications can't be relied on as official guidance, and they will stick it to you anyway!

I think you're right. But the cynic in me says to capture that screen for posterity and not point it out to them. Could come in handy if I ever have a client who was a bit short on their TH minimum.

The end of this thread addresses a similar question. Once you file an incomplete filing you are deficient, not delinquent (I confirmed this when I spoke with the Office of the Chief Accountant years ago); therefore, DFVCP is not an option.

To me, that was the point of the thread...you won't find any black/white answers. Safe approach is the limit the deduction for 2021, aggressive approach is don't. This should not be your call. Present the facts as known to the plan sponsor and their accountant and let them make the call.

If the absorbed organization discontinues and terminates its 401(k) plan, no severance-from-employment is needed, and the plan pays its final distribution as an involuntary distribution (even to those participants who have not reached any retirement age). A single-sum final distribution paid or payable in money should be eligible for a rollover into any eligible retirement plan, including a 403(b) plan. No alternative defined contribution plan. A distribution may not be made under paragraph (d)(1)(iii) of this section [plan termination] if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term “employer” contained in § 1.401(k)-6 [which further cross-refers to § 1.410(b)-9, which includes aggregations under sections 414(b), (c), (m), and (o)] is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash[-]or[-]deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f). 26 C.F.R. § 1.401(k) 1(d)(4)(i) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(d)(4)(i). In a situation of the kind described, some charities and practitioners might consider designing and documenting both plans so the default on a non-instructing participant’s involuntary final distribution is a rollover into the absorbing organization’s 403(b) plan. See 26 C.F.R. § 1.401(a)(31)-1/Q&A-7 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(31)-1. Although that is not a merger, it can have some practical effects that achieve an employer’s goal of maintaining one individual-account retirement plan. Some participants choose against a rollover, and some choose a rollover to a retirement plan other than the default. But I’ve seen situations in which 80% to 99% of the terminating plan’s amounts became rollover contributions (not a merger or transfer) to the “suggested” plan.

Pammie57, I agree with above from BG5150 and CuseFan and will add that the IRS seems to say in soft (website) and formal (Rev. Rul.) guidance that in their view if you have a partial termination, then everyone who terminates during the year in which the partial term occurred is "affected" and should be fully vested, regardless of why they terminated. I think a lot of practitioners think that position is not supported by the law, because the rule is that folks "affected" by the partial termination should be 100% vested, and arguably someone who quits for an unrelated reason, e.g. spouse geographic job relocation, would seem not to be "affected." Below is from the IRS's website. Rev. Rul. 2007-43, which is cited, says about the same thing. An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan. Some plans wait until an employee has 5 consecutive 1-year breaks in service before he forfeits their nonvested account balance. For these plans, employees who left during the plan year of the partial termination and who have not had 5 consecutive 1-year breaks in service are affected employees. See IRC Section 411(d)(3) and Revenue Ruling 2007-43.

The notice requirement was eliminated solely for the 3% (or 4%) safe harbor non-elective contribution, and solely for purposes of the ADP safe harbor. If you want to use a non-elective contribution to qualify for the ACP safe harbor - for example, you want to make a discretionary match that is not subject to the ACP test - then you still need the notice.

You have two separate but related issues - the timing for deductions and the effective date (and timing) for a plan year valuation. You can deduct the pension contribution for the PY in the fiscal year that begins in the PY, ends in the PY, or some combination thereof that I've never seen anyone actually do. You say when the valuation was done but do not say what the valuation date was - it has to be either BOY or EOY. A 1/1/2020 valuation, even if done late 2020 would use 2019 compensation. What I don't know is if you are allowed to do an EOY (12/31) valuation BEFORE the end of the year. Usually the reason plans will do EOY valuation is to use that year's compensation, whether to get owner(s) a better benefit, 415 limit, or accommodate annual fluctuations. My understanding is that you are supposed to use the most recent available data for the valuation, and if 2020 PY compensation was not available when doing the 2020 valuation, then using 2019 compensation (increased for salary scale) is proper - certainly if doing a BOY valuation and IF you are allowed to do EOY valuation before the EOY. I have not seen that done but doesn't mean it's not allowed. I'm sure someone out there who is smarter than me knows that answer.

The whole point is that they aren't due yet.

Like I said, it's not entirely clear. If the employer wants to take the safest option, they will limit their contribution on the PS plan to 6% of comp. I think either position is reasonably defensible. SFlannery-Nova didn't go into detail on the circumstances that caused the plan to cease to be covered, but I am going to assume that it's something like the last non-owner participant terminated employment and was paid out during the current year. As a result, the plan is now a substantial owner plan and is exempt from coverage. In that case, I would probably say that if the terminated non-owner participant is still getting a contribution in the PS plan, then you are on a lot safer ground than if the owner is trying to take that whole 25% deduction for themselves.

I would be concerned absent guidance that since the deduction is with respect to the plan year, an agent might take the position that coverage under ERISA 4021 is required for the entire plan year.

No. From the premium filing instructions:

I'm not aware of any clear guidance on this issues, but I would be reasonably comfortable taking the position that if the plan was covered by PBGC at any point during the year, then they are still exempt from 404(a)(7). After all, you are still required to pay the full premium even if coverage ceases mid-year.