Money purchase termination and profit sharing startup

[ac]

We have a client that terminated their money purchase plan on Septermber 30. They adopted a profit sharing plan on January 1. We are going to calculate the money purchase contribution based on compensation through september 30. A cross-tested profit sharing contribution will be made. The amount of the PS contribution will be based on testing.

Can we aggregate the money purchse contribution with the profit sharing contribution for the minimum gateway and testing?

[AndyH]

The facts are less than 100% clear. If the two plans have the same plan year, yes. Otherwise no. A termination date does not necessarily indicate a beginning or end of a plan year.

[ac]

The money purchase plan was a calendar year plan and terminated September 30th. An integrated allocation (15% plus excess) was made to the plan based on compensation received through September 30th. The profit sharing plan, also calendar year, was adopted January 1. The client wants to make an additional contribution to the profit sharing plan to get a total $40,000. He wants to give himself and one other HCE approximately 1.5%. The only other participant is a NHCE. Of course he does not want to give the NHCE any additional allocation (other than the 15% money purchase).

My questions are:

1) Can the two plans be aggregated for testing given the fact that the money purchase terminated September 30th?

2) Can the 15% allocation to the NHCE be used to satisfy the gateway requirement?

Any input is appreciated!

[AndyH]

If the money purchase assets were distributed before 12/31, in which case the plan year would be a short one, and would be different than the PS one, then I think the answers to your questions are both NO. If the money purchase assets were distributed after 12/31, in which case the year of termination is a full plan year, then the answers to each question is YES.

[mwyatt]

Hey Andy:

Intrigued (or confused). I would think that the point of relevance would be the basis for compensation of the MP contribution. The termination date of 9/30 is a fixed point, which would define how much compensation was taken into account in determining the MP contribution. Whether the client rushed or dallied in actually distributing the money before or after the calendar year end doesn't seem to have any bearing on the testing...

(of course, I'm about to have to argue with an IRS actuary that my client was not a bad person for not blindly sending out checks under 5k to people who had no chance of rolling them over to an IRA since noone could find them, so what can I say about logic?)

[AndyH]

Maybe it is me. Let me try again.

All I am trying to say is that if the sponsor wishes to combine allocations for purposes of the gateways then the plans must be permissively aggregated for 410(b) and 401(a)(4) and among the prerequisites is that the plans have the same year. This is specified in 1.410(b)-(7)(d)(5).

And I am suggesting that a formal termination of a plan followed by an actual distribution of funds during that year creates a short year, which I agree could possibly have been avoided if the sponsor "dallies" in a way that distributions are delayed until the next year. But if not, there are two different years, and hence the plans can't be combined for the gateways. I think.