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Going back to the original question, do you have to cover 95% of zero or the 3 former owners, my understanding is the answer is neither is enough. If there are 40 active employees when the plan is terminated the QRP would have to benefit at least 95% of 40. If you terminated the CB plan before the date of the sale and kept the PS plan open up to the date of the sale and terminated the PS plan as of the day before the date of the sale and amended the allocation conditions so everyone active on the day before sale received an allocation and that did not blow up 415 limits you may have choreographed enough steps to dance to.

What will be the plan(s) termination date and when will employees terminate? If you transfer and use for PS that ultimately benefits 95% of those 35-40 (or however many were employed in 2023) then I think you should be fine. If the thought is to benefit three remaining partners, even if they were only actives left, that seems problematic to me and doesn't pass the smell test - doing what the rules are guarding against. Remember to coordinate your CB and DC plan terminations/PYEs if you're aggregating for testing. This also brings up the question - can a terminating plan be used as a QRP? I do not recall reading any prohibition against this, just that there are requirements when the QRP is terminated, so you should be OK as it sounds like you'd easily be compliant. Of course, this is just my non legal opinion. It doesn't hurt to get a legal opinion from qualified ERISA counsel.

Section 1.401(a)(4)-11(g)(5) reads: "(5) Effect under other statutory requirements. A corrective amendment under this paragraph (g) is treated as if it were adopted and effective as of the first day of the plan year only for the specific purposes described in this paragraph (g). Thus, for example, the corrective amendment is taken into account not only for purposes of sections 401(a)(4) and 410(b), but also for purposes of determining whether the plan satisfies sections 401(l). By contrast, the amendment is not given retroactive effect for purposes of section 404 (deductions for employer contributions) or section 412 (minimum funding standards), unless otherwise provided for in rules applicable to those sections."

Rev. Ruling 2002-27 said that the participant's cafeteria plan right to elect to receive cash instead of medical benefits was effectively impinged upon (by requiring them to certify they have other group health coverage) - and that practice effectively converted the amount that would have been an elective deferral under 125 (that would have been includible in comp under section 415) into an employer-paid medical premium that was excludible from comp under section 415 (as employer provided medical coverage excludible under section 106(a)) - but only for those who didn't or couldn't certify their ability to receive other coverage). This was a messy and somewhat inequitable result - because the amounts that would have been paid toward the employee's portion of medical coverage for some people was 415 compensation (who certified that they had other coverage) but was not 415 compensation for others (who didn't and couldn't certify they had other coverage). The ruling probably was issued in 2002 because some employer had adopted this practice and treated the amounts that the employee wasn't allowed to elect to receive in cash as elective contributions under 125 (and thus includible in 415(c) pay) and was looking for a way to include these amounts in 415 pay (to avoid some sort of retirement plan qualification failure). The issue probably came up when an employer submitted a plan for a determination letter for GUST (when section 415 pay definitions were required to be amended to include elective deferrals under section 402(e)(3) and 125 for the first time - starting in 1998). I think the upshot of the ruling was that even though the plan in question shouldn't have included the amount that they mistakenly included in comp as if they were still section 125 elective deferrals, IRS gave them relief by saying they could treat such amounts as if they were section 125 deferrals (even though they were really employer contributions excluded from income under section 106, not section 125 elective deferrals). I still see some plans that include deemed 125 comp in their plan documents. Nowadays, employees can go to the ACA marketplace and get access to coverage going forward without pre-existing condition exclusions. Now employers seem to be more concerned about meeting the ACA employer mandate (and offering affordable coverage to enough employees) than they are about paternalistic concerns about employees opting out of employer sponsored coverage and then not being able to get coverage outside of the employer plan. Mostly, those who still have deemed 125 comp in their plan documents probably don't still carry on the practice of requiring proof of other other group health coverage for employees to opt out of employee only coverage to receive cash (or taxable benefits) from their cafeteria plans, but since they are a pension plan (and they need to look at pay over the employee's career), they did so at one time and still include the deemed 125 comp in their pension plan's pay definitions for the period back when they used to do it.

Regarding the EZ, the instructions for the form are explicit: "Who Does Not Have To File Form 5500-EZ You do not have to file Form 5500-EZ for the 2022 plan year for a one-participant plan if the total of the plan’s assets and the assets of all other one-participant plans maintained by the employer at the end of the 2022 plan year does not exceed $250,000, unless 2022 is the final plan year of the plan." What they don't say is if you file a 5500EZ in one year and do not file one in the following year, there is a good chance your future holds getting an IRS letter asking why there was no subsequent filing, or worse, you get a letter saying you owe a bazillion-dollar penalty. Either way, it creates an unnecessary interaction with the IRS. If the plan terminates, it will need to file a 5500EZ regardless of the amount of assets indicating the filing is the final filing. Once the participant reaches RMD age, the plan will have to pay an RMD in addition to any RMD paid from the IRA or IRAs. If the individual has multiple IRAs, the amount of the RMD is calculated based on the amounts in all of the IRAs, but the individual can choose the IRA or IRAs from which the RMD is paid. The above are practical reasons for terminating the plan now. On the other hand, we have a client who has an emotional attachment to their solo plan. To them, terminating the plan is like deciding to retire and they are not prepared to acknowledge that there most productive years are past.

David, that is an awesome statement and so true!

This was the first clue that something crazy was happening, as they do what's easiest for them. I'll repeat this forum's mantra - read the plan document and the loan program and related forms to see if they say anything applicable, they may or may not, but should be consulted first. Next question would be how are the interest payments being applied, is it in such a manner that each "source loan" is essentially being amortized separately (less interest into PS as that principal is paid down and more to the sources yet to see principal payments)? If so, and if the plan documentation supports (or does not prohibit) this then it's probably OK. Also need to make sure provisions concerning loan as directed investment (I assume) and general plan investment election provisions are not being violated by this in some fashion.

Lou, thanks for restating the mantra of this forum. RTFD should ALWAYS be the first course of action.