johncerten

This is an interesting plan design question. My understanding is that the short plan year created by terminating the Defined Benefit Plan on 7/15/2026 does not automatically prevent it from being tested with the Profit Sharing Plan for the same limitation year, but there are several technical considerations that need to be reviewed. The key issue is that the plans must be tested under the applicable coverage, nondiscrimination, and cross-testing rules using the correct plan year and benefit allocation data. A DB plan that terminates mid-year will generally have a short plan year, and the testing implications should be carefully coordinated with the PSP’s 12/31/2026 plan year. I would pay close attention to: Whether the DB and PSP are part of a controlled group or otherwise required to be aggregated. Whether the plans have historically been tested together and whether the testing method remains consistent. How the short-year DB accruals and the PSP allocations are treated for the 2026 nondiscrimination testing. Whether the DB termination creates any timing or operational issues under the applicable IRS regulations. From a practical standpoint, terminating earlier to avoid additional overfunding may make sense, but I would have the TPA/actuary run the 2026 testing scenario before finalizing the termination date. A projection showing the 7/15 DB termination combined with the year-end PSP should confirm whether the intended cross-testing approach produces an acceptable result. The bigger concern may not be whether the two plans can be tested together, but whether the short-year DB termination affects the assumptions and testing methodology that have been used in prior years.

This is definitely a situation where I would want to slow down and document everything carefully. The main concern is that the refund appears to have been paid to the plan sponsor instead of the plan, which means the plan assets may have temporarily been outside the plan’s trust structure. Whether this rises to the level of a prohibited transaction depends on the specific facts, including how the advisory fees were structured, whether the fees were actually paid from plan assets, the plan document/fee arrangement, and whether the sponsor or any party received any benefit from the funds being held in the corporate account. If the refund was intended to return plan assets, the cleanest correction would likely be to return the full amount to the plan as soon as possible, allocate it appropriately to affected participant accounts, and maintain detailed records explaining: why the refund was issued, why the check was made payable to the sponsor, when the funds were received and returned, how the allocation was calculated. I would also avoid simply moving the money back without consulting ERISA counsel or the plan’s third-party administrator, since the handling of plan assets and potential prohibited transactions can have reporting and correction implications. The key question is: were the advisory fees originally paid from plan assets (for example, as a plan expense deducted from participant accounts), or were they paid directly by the sponsor outside the plan? That distinction could significantly change the analysis.

Generally, yes. If a plan relies on the "each participant is a separate allocation group" approach, it still needs to satisfy the applicable coverage requirements under IRC §410(b). If the ratio percentage test isn't met, the plan typically has to satisfy the Average Benefits Test, which includes the nondiscriminatory classification test and the average benefits percentage test. Whether a haphazard allocation pattern ultimately passes depends on the specific employee population, the allocation groups, and the demographics of highly compensated versus non-highly compensated employees. In practice, it's often a good idea to run the coverage testing before finalizing allocations to avoid unexpected compliance issues.

This is an interesting situation. A partial termination analysis would depend on the specific facts, including the plan document, the number of participants affected, and whether the change from employee to independent contractor is considered a severance of employment under the plan and applicable rules. Since the part-time employee has been receiving profit sharing and has an existing vested balance, it would be important to determine whether this transition is a legitimate change in employment status or effectively a termination. If the employee is no longer eligible to participate, the reduction in active participants may need to be reviewed for possible partial termination implications. I would recommend reviewing the plan provisions and consulting with a qualified retirement plan professional or ERISA counsel before making the change.