Naughty Client!

[Guest LKHartnett]

We have a client with a straight 401(k), never really administered with much heart, and they have decided they just don't want it around any more . . . too much trouble.

Because of their lack of interest in the past few years, over time no new eligibles have entered the plan, and now the only people with balances left in the plan are terminated. What's more, they all have balances well under the $3,500/$5,000 threshold.

Client doesn't like to part with money either . . . they do not want to pay for a restatement/amendment for new law. They have decided it is just as easy, and legal, to liquidate the plan under the involuntary cash-out rule, and just leave it alone . . . file that final 5500 for 2002 and be done with it.

I am thoroughly uncomfortable with this scenario, but I am just a cog in the works . . . what are the implications?

[E as in ERISA]

If they don't officially terminate the plan, then they still have to continue to follow the requirements -- including the requirement to allow eligible employees in. So it might become active again.

If they terminate without first amending for new law, then they have operational violations.

Some say they are more likely to get selected for IRS audit if they terminate without filing for a determination....

[Guest LKHartnett]

Aha, just what I was hoping . . . armor. Thanks.