Term Profit Sharing/Keep 401(k)??!??

[Guest Powers]

I have a client that has a Profit Sharing Plan with a 401(k) option. They have informed me that they want to ‘terminate’ the Profit Sharing portion of the plan and keep only the 401(k) option. I did not think that would be a problem as we could make the Profit Sharing contribution discretionary, but they informed me that they want to ‘terminate’ the Profit Sharing so that they can distribute it to the participants. Any idea of how/if this can be accomplished?

[E as in ERISA]

They could amend the distribution terms. The profit sharing money is not subject to the same distribution restrictions as Section 401(k) money. They can make the money available after a fixed number of years (at least two), a stated age, or a specific event. It might not make the money available to everyone currently, but it would probably be cheaper than doing a spin-off, termination and distribution.

[Guest cease]

I am interested to know why the plan sponsor wants to distribute assets. On the surface, it is my guess that plan assets are tied to investment contract that is difficult to get out of (unless the plan were to terminate). Did you look at IRC 1.401-6(b)? I think a 401(k) feature inside a profit sharing plan that allows for discretionary ER contributions is comparable to a 401(k) feature inside a profit sharing plan that doesn't allow for ER contributions. In other words, I don't see what reason the plan sponsor could use to allow for a termination of the current plan (especially if the main interest is to distribute plan assets).

Hope this helps. Good luck.

[401 Chaos]

Powers, I assume the client also understands that termination will cause accelerated vesting of all unvested amounts if the profit sharing contributions are subject to vesting schedule. As others note, I am interested to know why they want to terminate and distribute.

[Guest Powers]

Thank you all for your responses.

This client is the owner of a family business and the bottom line, as he indicated to is that he is "sick of giving money to people who don't want to give money themselves". Initially he had wanted to terminate the plan altogether because an employee, who did not defer and received large PS contributions, terminated and took his client list. As you can see, despite countless conversations and recommendations from me, the investment broker and the client's accountant, the client is deeply swayed by emotions surrounding company loyalty, which makes it difficult to massage the relationship and to advise him that he must separate his personal feelings from the administration of the plan.

He wants to distribute the PS assets so that he doesn't have to see it on the reports as it is disturbing to him as he wonders which employee is going to leave next with their PS $$.

Wouldn't administration be so much simplier without those pesky clients!