Terminating a Profit Sharing Plan

[Guest LWilson]

We have a client who has a one-person Profit Sharing Plan.

In 1999 she "terminated" a predecessor Profit Sharing plan by rolling the assets into an IRA, and she started a new Profit Sharing Plan with a new account. The reason for this is murky, but it had something to do with going from being a "P.C." to an "Inc."

In 1999 she filed her final 5500 for the old PSP, and filed the first 5500 for the new PSP.

With all the restatements going on this year, Vanguard sent her an Adoption Agreement package for both plans, though the one hasn't been alive for a few years now. Vanguard says that if the client had intended to terminate the plan, she should have updated the plan back in 1999 and gone through the formal termination process with the IRS(!) (I didn't know this was necessary with DC plans . . . ). Because it wasn't done in 1999, it needs to be done now(!) says Vanguard.

Is this true? I feel so uncertain about what needs to be filed, etc., because this isn't like a DB plan termination, right?

[rcline46]

The termination of any qualified plan is the same - see instructions to form 5310. DB plans are just a bit more complicated.

And Vanguard is right, the plan should have been in compliance with all laws in effect in 1999 to be terminated properly. My opinion is that the plan still needs to be in compliance and a an amendment should be adopted.

As to filing with the IRS, recommended but not required.

[david rigby]

At the risk of irrelevance,

was the plan terminated or was it "terminated"?

[Guest LWilson]

Well, the assets were liquidated and the final 5500 was filed for the 1999 Plan Year as "the final 5500." The intent was that contributions and plan administration would be completely discontinued because this new PSP was essentially replacing it.

It was our understanding that really only plans falling under Title IV (DB) were really required to go through all the paperwork with the IRS.

So as far as "termination" goes, it was terminated in spirit . . .

[david rigby]

Hmmmm. If the "assets were liquidated", that implies some prior action, probably either formal declaration by the plan sponsor (such as resolution by the board of directors) or an event that caused all participants to have a distributable event, such as severance of employment.

If the former, then you do have a plan termination. If the latter, then you have a "matured" plan, one that has distributed all benefits due, and properly filed a final 5500.

[Guest LWilson]

Would a 5310, etc. need to be filed then? Would the plan need to be amended and restated, say, for 1999 law?

I'm just slightly concerned. I don't know if Vanguard is just being overcautious, or if there really is some sort of finalizing process that needs to be pursued. I am more than happy to do it if it's necessary . . . I just want to make sure it's necessary.