Termination vs merger - successor plan issue

[Guest Robin Vatalaro]

I have a company that has two PS plans. This ocurred because there are multiple locations and lack of communication, eg two plans were not the intended result. One PS plan, established years ago is only a PS plan and has no k provision. The second plan, only a few years old, has a k provision. The first plan has had no contributions for many years (so we don't have 415 limit issues etc).

The company desires to terminate the first PS plan and distribute the assets in accordance w/ the participant's wishes. Please forgive me, I do not have a lot of familiarity w/ the successor plan rules. In my reading, I have come across several references that the successor plan rules only apply to k deferrals. Is this correct? If that is the case, then I assume I can distribute my first plan w/o having to merge the assets into the second plan (the employer wishes to maintain the second plan).

Thanks for any help.

[Mike Preston]

I don't see any problems with terminating and paying out. Go for it.

There is only one issue I can think of and it is so esoteric that I'd be surprised if it applied to your plan. Just confirm one thing and you should be free of the esoteric issue I'm thinking of: If, with respect to vesting service, the second plan credited all periods of time with the employer, then you are fine.

However, if the second plan only credits service since the inception of the second plan for vesting purposes, the esoteric issue needs to be addressed. Most plans (like 99.9%) will have been drafted to credit service before the effective date when there was a prior existing plan.

[QDROphile]

You must comply with Treas Reg 1.411(a)-11(e)

[david rigby]

You can get to that reg. here: http://www.access.gpo.gov/nara/cfr/cfrhtml...26cfrv5_00.html

But a more basic question. Why terminate? Why not merge the plans? Avoid the expense of termination. Having more money in one trust might give more options in offering investments.

[Guest Robin Vatalaro]

Thank you everyone for your replies. I suggested merging, definitely makes more sense. The owners have their minds set on letting the participants of the older plan do whatever they wish w/ their funds, take the cash whatever. Yes, a lot more work!

[actuarysmith]

I am not sure your "real" question was answered..........

The succussor plan rules (i.e. not reestablishing a plan within 12 months, etc.) only applies to a 401(k) plan, not a profit sharing plan.

[Kirk Maldonado]

ActuarySmith:

I think your statement is a bit overbroad. Read Section 1.411(a)-5(B)(3).

[Mike Preston]

And we come full circle. Other than ensuring that service is credited in the 401(k) plan (for vesting in employer contributions like matching, etc.) for all periods when the profit sharing plan was in existence, do you see any other issues associated with the fact that the profit sharing plan is a predecessor plan of the 401(k) plan until the 401(k) plan has been in existence without the profit sharing plan for five years?

I still think that most plan sponsors routinely credit service from the date that another existing plan was effective when they install a second plan.

[actuarysmith]

I am not sure my comments were interpreted correctly. Nor do I think anyone answered the original question.

I think that the original question had to do with Reg 1.401(k)-1(d)(3).

The IRS has a prohibition against terminating a plan (a 401(k) plan) to create distribution options "articficially" and then setting up another 401(k) replacement plan.

If this were possible, an owner or key exec could get around not having a distributable event (termination, retirement, death, disability, hardship, etc.) by termination of the plan.

All I was saying is that the 12 month prohibition against setting up a succussor plan only applies to salary deferrals under a 401(k) plan - at least that is the way I read the reg.

So, back to the original question. Because we are talking about a PSP, I don't think that the 12 month rule is applicable.

My answer had nothing to do with vesting or whatever else the rest of you are talking about.

I am sorry to be blunt and I hope noone finds my answer offensive. I may be way off base and Maybe I am the one who doesent get the original question!

[Mike Preston]

Martin (?), no offiense taken at this end. I just see somebody trying to ensure that the original poster's question was indeed responded to.

But I think the original question, as asked, was answered in the very first sentence:

I don't see any problems with terminating and paying out. Go for it.

QDROphile very appropriately brought up the issue of 1.411(a)-11(e) which merely requires that the plan participants be given the option to move the monies into the other plan of the employer.

The vesting issue doesn't impact the termination and payout of the PS plan. Instead, it merely requires that the 401(k) plan take into account all service with the employer when either plan existed unless the PS plan is proven NOT to be a predecessor plan to the 401(k) Plan. I know this sounds weird, but I'm not talking about the successor plan rules that you alluded to (1.401(k)-1(d)(3)). Instead, I'm talking about the predecessor plan rules of 1.411(a)-5(B)(3) as Kirk mentioned. So, as long as the 401(k) plan credits all service with the employer, or at least from the time that the original plan was effective, there is no issue.

However, if the 401(k) was set up with full knowledge of the predecessor rules and it still didn't credit service before its own effective date, then the operation of the 401(k) plan needs to be reviewed in a new light.

[actuarysmith]

Mike-

Thanks for the clarification! Now I follow what the hub-bub was all about..................

I re-read your original post and yes, you did answer the question after all.

[Guest Robin Vatalaro]

At the risk of continuing this thread - I just wanted to say "thanks." The message boards are an invaluable resource!

[PMC]

Is there any concern with 1.401-6(B) and the definition of termination and the fact that the 401(k) plan in this case could be considered a comparable plan?

[RCK]

Separate issue:

If this were my client, I'd be sure to go back and make sure that their handling of the plans were correct for all the coverage, and participation rules. I'd be willing to bet that the 5500 filings were not done on a controlled group basis. That is, they were undoubtedly part of a controlled group, and each answered the questions of 5500 question 21 (old format) on the basis of their own population.

RCK

[mbozek]

Phil: Reg 1.401-6 is a pre ERISA reg that applies only to public and church plans exempt from ERISA. The termination regs for ERISA plans are under 1.411(d)-2. The concept of comparable plans does not exist for termination of an ERISA plan which is subject to the rules of IRC 401(k) regarding sucessor plans.

[Guest Tom Geer]

The "first plan" is not a K plan, and Mike Preston is dead-on correct.

[jane123]

Hello,

I am checking on this for Denise, who has a better understanding of successor rules than I do, so bear with me if my question seems too basic.

Question 1: Client had Company A and a Professional Association (PA).

Company A had a PSP, which covered employees

Company A was sold.

Client now works for Company that bought Company A, and the income passes through the Professional Association.

Can client terminate PSP and set up a new 401(k) for the PA?

My concern is that Company A and the PA was part of a controlled group, which would mean that the PA is still the sponsor for the PSP? Not sure.

Even if they are part of a controlled group, can the PSP be terminated and the 401(k) adopted? The 401(k) will have a PSP feature.

Question 2 (actually my question): Regarding the Original poster’s question. If they maintained two PSPs’, isn’t that one plan for purposes of the rules- just that they are under different plan documents? And if so, wouldn’t that mean that you could not terminate one, while the other remains?

Appreciate your help.

[jane123]

Anyone?

[Kevin C]

Question 1: Client had Company A and a Professional Association (PA).

Company A had a PSP, which covered employees

Company A was sold.

Client now works for Company that bought Company A, and the income passes through the Professional Association.

What does Company A do? Attorney? Accountant? Widget manufacturer?

Is Client now a common law employee of Company A under its new ownership?

What type of services does Client perform for Company A now? Management functions, perhaps?

[jane123]

Question 1: Client had Company A and a Professional Association (PA).

Company A had a PSP, which covered employees

Company A was sold.

Client now works for Company that bought Company A, and the income passes through the Professional Association.

What does Company A do? Attorney? Accountant? Widget manufacturer?

Is Client now a common law employee of Company A under its new ownership?

What type of services does Client perform for Company A now? Management functions, perhaps?

Company A is a dentistry

Yes. Client is now a commonlaw employee under A

Client A does dentistry work for Company A, as an employee.

[K2retire]

Sounds like a classic affiliated service group.

[jane123]

Sounds like a classic affiliated service group.

That's what I thought at first. But there is no relationship, other than him being a w-2 employee.

Thanks for all your help. No need to provide additional responses, unless you want to. I am handing this one back to the boss as she is back.

J