adding 401K feature

[Guest MNR]

employer has a profit sharing plan. Would like to add a 401k. Is it possible to eliminate the p/s portion by rolling over the balances into the 401k and have this feature only? comments anyone?

[actuarysmith]

Yes, of course. However you do not need to "roll over" the balances into the 401(k). You may leave them where they are, add 401(k) features to the plan, eliminate the employer discrestionary contribution language.

Don't confuse where the money is parked with what the plan is - I hear this all the time.

On a prospective basis, you would have 401(k) features only.

Why do you want to eliminate the profit sharing plan features? There is no obligation for the employer to contribute in this manner anyway. You could retain the option in your document, but just have the employer choose not to contribute.

[Guest MNR]

thanks for your answer actuarysmith. I guess the only reason would be that participants would like complete discretion over the funds and the employer would like to not have the responsibility over the funds, investment returns, etc. does this make sense?

[david rigby]

Different issues. The "profit-sharing" and "401(k)" terms refer to how (and why) money gets into the plan. Whether the participants have ability to direct the investments is related to what happens to the money after it gets into the plan.

[Guest MNR]

your correct pax. the question is if the employer so desires, can the p/s be eliminated and have only the 401k. I believe the other alternative is to let participants direct the p/s portion as well.

[Tom Poje]

This was not raised, so you had to make me look it up.

According to the ERISA Outline Book, deferrals are enough to satisfy the 'substantial and recurring' rule pertaining to profit sharing plans, and therefore you would not have to vest 100% upon discontinuence of the profit sharing contribution. The book also notes the IRS has not really ruled on this, it is merely an interpretation of the regs. Interesting, I would have guessed the other way.

[actuarysmith]

MNR -

You seem to be mixing and matching concepts and ideas.

Where the trust assets are invested, whether or not you have PSP provisions, and whether or not employees have the right to direct their investments are all seperate issues.

Don't confuse the plan, the rights and features, and the assets.

You could leave the PSP funds where they are and continue to have PSP features in the plan, or not...............

You could leave the PSP funds where they are and continue to have employer direction, or change to employee direction.

You could move the funds to whereever the 401(k) funds are, and have employee or employer direction of funds.

Again, there is no need to eliminate the PSP features. Leave them in the plan. The employer is under no obligation to contribute. If the employer is worried about fiduciary liability, consider allowing participant direction of investments.

[wmyer]

This was also not raised, but if the plan is top-heavy and key employees make 401k contributions, a profit-sharing contribution may be required. You may not be getting rid of profit-sharing after all.

[Erik Read]

The other issue in amending the documents to "not include a discretionary PS provision" is that in the event of ADP/ACP failure, you would lose the QNEC/QMAC option for correction - not just Top Heavy issues.

I always recommend leaving the discretionary PS language in, and adding the CODA provisions for those that want the 401(k).

The document can also be written to maintain trustee direction of the Profit Sharing assets, and allow the participants to direct their deferrals and any company match that may be made on their behalf. We've done this where the trustee, doesn't trust the decision of the employees to manage their retirement in their best interest, and want's to maintain liability for a portion (if there is such a thing) of the assets.

Hope that's not too confusing.