Draper55

If a plan terminates late in a calendar year and there is overfunding and the goal is to transfer 25% to a QRP and revert the balance to the employer, must everything occur in the same taxable year? Can the transfer and/or the reversion be spread across 2024 and 2025? Could the required 25% be spread across two years?..would this create two seven year clocks? Could the reversion be spread across the two years? A little simpler, can the transfer happen entirely in 2024 and the reversion entirely in 2025?

Thanks for the comments. My preference is to not rescind the termination due to potential legalities and me not wanting to practice law as a non attorney. However, they will have to wait 12 months I believe to put in a replacement plan. This causes some difficulty with a delay in doing a 4980 transfer from the terminated defined befit plan. While the 100% vesting could remain, as RBG points out, the opportunity to distribute say safe harbor contributions on other than a hardship distribution is lost and this could not be brought back if the plan were ongoing. I had anticipated QNECs to cover the lost deferral opportunity and the missed safe harbor contributions retroactive to the date of plan termination.

If a plan sponsor wants to undo a plan termination, is the 100% vesting that was stated in the resolution to terminate also reversible? The resolution is not a plan amendment and hence the plan document has not been modified. I am thinking that if the termination resolution stated that all benefits were vested as of the termination date and subsequently a resolution is executed to nullify the plan termination the 100% vesting could be reversed as well. The plan vesting schedule was never amended. I would think certainly benefits accrued after the termination date could be subject to the vesting schedule going forward. Any thoughts on this?

Try calling Andy Powell at 727-488-3338;he is a Florida attorney who is familiar with these transactions...

Does the assumed 3% missed deferral apply to both HCEs and NHCEs in a 3% nonelective safe harbor 401(k) plan. I believe it does so that for the period of exclusion the HCE would get .5*3%=1.5% QNEC but of course not receive the 3% safe harbor contribution since not an NHCE.

I believe so but you must back the QNEC for the missed deferral out of the otherwise applicable plan or 402(g) limit for the year..

The ability to take loans as needed in addition to the potential additional creditor protection could justify the maintenance. Further, the ability to make a wider array of investments subject to the trust agreement could also be a motivating force.

John...do you think it is a brother sister controlled group?...I am not sure why it would not be; 80% control of both entities and a controlling interest of both entities when considering identical ownership..

An individual is a sole proprietor and also is a partner in a partnership with 51% ownership and one other partner at 49%. I think this is a brother sister controlled group. Does this mean that the minority partner must be covered in the defined benefit plan of the sole proprietor to satisfy the 2 participant floor of 401(a)(26) considering the controlled group? If so, could a solution be for the spouse to become a W-2 employee of the sole proprietor and then cover the spouse to satisfy 401(a)(26)?

If an individual has two plans, a 401(k) and a defined benefit plan, and the defined benefit plan exceeds $250,000 in assets, but the 401(k) has not been funded, is it required to file a Form 5500-EZ for the 401(k) showing one participant and $0 in assets?

Client directs me earlier this year to terminate their cash balance and safe harbor(3% nonelective) 401(K) plan due to a business decline. Appropriate resolutions,notices etc. were done. Subsequently, business improves, and they decide to still have a 401(k) plan and only proceed to terminate the cash balance plan. Small business 401(k) with owner and about 10 employees. No deferrals were made prior to the 401k plan termination. Wondering if anyone has done a 401k pan termination/nullification and what are the issues..Perhaps it is best to just proceed with the termination and start a new 401(k) in 2025; however, the successor plan rules could be an issue. If we restart the terminated plan, I am thinking the HCEs should not defer anything for 2024 and hence not require the safe harbor to satisfy the ADP. It would then be up to the sponsor to decide whether to give say 3% to the employees for the entire year or not since it would not really be a safe harbor plan for 2024..Any thoughts?

I agree with Lou. You can't make a 2024 contribution in 2023. It is too late to be a 2022 contribution...It must be a 2023 contribution and go on the 2023 5500 and SB.

I agree with the comments here. Practically if the sponsor is broke what is the solution? As the sponsor is also the Trustee, is it not reasonable as Trustee to write off the contribution receivable as uncollectible so that the plan and the associated filings can actually end? My understanding is that the IRS cannot waive the first tier 4971 tax but not necessarily the 100% tax. Could the 10% 4971 tax be paid and call it a day without making the final unpaid minimum? It is an owner only and spouse plan.

It is a owner and spouse only so whether they make the final contribution is not certain. They will need to pay the excise tax though. It is interesting that the 430 regs state the plan year for 430 purposes ends on the plan termination date. Since it further states that final quarterly is due 15 days after that date, one would assume the final minimum is due 8.5 months from the plan termination date which will likely be disconnected from the 5500 filing timeline.

Very good point..note the prior year contribution was not made as well(excise tax paid though) ..hence if they do not make the final contribution(s) the plan year ends on the date of the distribution in mid November2023 and the 2023 5500 is the final 5500 due on extension 9/15/2024. if the outstanding contributions are made...then the plan year end is 12/31/2023 and the contribution due date becomes 9/15/2024 and the final 5500 is for 2024...

It has been previously asked here whether for a short plan year with a mid month distribution date(final distribution on plan termination) when the 5500 filing is due and the response has been 7 months after the close of the distribution month. Is it also true then that the deadline for a minimum required contribution would be 8.5 months after the close of the distribution month and not 8.5 months after the date of the final distribution? In other words ,could a schedule SB show a contribution 8.5 months after the close of the final distribution month?

Suppose a participant in a traditional db plan terminated employment 10/31 and has an annuity starting date of 11/1. If they receive two months of severance comp which is not paid until 12/31 can that comp be included in the accrued benefit as of 10/31 and become part of the first payment on 11/1? If the severance comp is paid in the final 10/31 pay I think clearly it is okay. The first scenario does not seem correct to me but I cannot say why precisely. Would it be different though if the benefit calculation is done after 12/31 with a RASD to 11/1? The plan document says that the accrued benefit is as of a date but compensation seems to be related to the plan year?

If you have an SOB provision but do not give out the notices do you not have the same effect as removing it? It is as you suggested difficult to put in with regard to previous accruals. If you leave it in, you may have the option of applying it prospectively for an HCE which could be desirable in circumstances such as HCE is at the 415 comp limit post NRA and you do not want to put the HCE into receipt.

If a plan is terminated mid year, the 430 regs tell us to use the termination date as the val date and treat the plan for 430 purposes as having a short plan year. The minimum is due 8.5 months after the end of the short plan year. Do we count 8.5 months from the end of the month like with the final 5500 filing or is a more precise counting required. For example, if the plan terminated today 10/23/2023 is the contribution due date 7/15/2024 or some other date?

I was wondering if anyone could provide the name of a dc recordkeeper only for a 401k/cash balance combo plan for a small employer(< 20 participants) preferably not too pricey. Thank you.

I have an expansion of the work force as of January 1. These newly covered employees were previously excludables. Is it reasonable to disregard them with regard to the prior benefit structure under 401(a)(26) since they were not eligible to have accrued anything prior to 1/1. The cash balance book I have discusses this issue with regard to new plans; the same issue is involved here. Hard to imagine the force of 401(a)(26) is somehow to require the granting of past service credits upon entry to satisfy the prior benefit structure test. Short on time to research this in depth so any existing knowledge or thoughts would be appreciated.

Rereading the Paul Schultz memo recently I am wondering whether shareholder employees, which could include family members on the payroll, really need to get a .5% accrual. The force of the letter seemed to be that nonshareholders were being discriminated against absent a meaningful accrual. Could we not have children who are shareholders receive less than .5% accruals, assert that they are benefiting for 401(a)(26) and still satisfy the spirit of the Schultz memo? The Schultz letter is focusing on accrual rates for nonshareholders employees that are less than .5%. It seems to says nothing to the effect that shareholder accruals less than .5% are not meaningful. Any thoughts on this?

Yes parents own each others stock by spousal attribution and own the childrens stock as well so this would be brother sister group....

The 5500EZ can be used if it(the plan) is for only a owner and spouse or only partners and spouses..It seems this extends to the bonding coverage exempton as well. If we swapped partners for members of an LLC would this work or are we stuck with a pure partnership concept?

If your interpretations are correct this would add alot of flexibility for eoy vals...you could increase benefits for 410(b),401(a)(26) and 401(a)(4) as needed and raise the 404 limit if beneficial...