Successor Plan

[Guest jim williams]

In the event a 50/50 partnership that sponsors a 401(k) plan dissolves, terminates the plan, and distributes all assets, if one of the partners continues the business as a sole proprietor can he establish a new DC plan without violating the successor plan rule?

[mbozek]

There is no prohibition on establishing a qualified plan after the 401k plan is terminated. What sucessor plan rule are you thinking of?

[WDIK]

I would venture a guess that jim is referring to 1.401(k)-1(d)(3) of the Treasury Regs.

(3) RULES APPLICABLE TO DISTRIBUTIONS UPON PLAN TERMINATION.

A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains a successor plan. For purposes of this rule, the definition of the term "employer" contained in paragraph (g)(6) of this section is applied as of the date of plan termination, and a successor plan is any other defined contribution plan maintained by the same employer. However, if at all times during the 24-month period beginning 12 months before the termination, fewer than two percent of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not a successor plan. The term "defined contribution plan" means a plan that is a defined contribution plan as defined in section 414(i), but does not include an employee stock ownership plan as defined in section 4975(e) or 409(a) or a simplified employee pension as defined in section 408(k). A plan is a successor plan only if it exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan.

[mbozek]

If a partnership is dissolved I dont see how a sole proprietorship can be the same employer because a sole prop is a separate business entity, not a continuation of the pship and does not use the pship TIN. If you dont feel comfortable with that answer then establish a SEP or a simple plan for 1 year.

[Blinky the 3-eyed Fish]

My opinion is that the related employer rules would be applied here. In this case if the 50/50 partners are unrelated, then clearly it is not a controlled group. It would then not be a successor plan for consideration of the distribution restrictions because it's a "new" employer.

[Guest jim williams]

My concern is that I had a legitimate distributable event to justify distributing elective contributions from the 401k plan. You both confirmed my interpretation that a sole proprietor would be considered a new employer. In any event, now that I think about it, I can apply the severance from employment rules enacted under EGTRRA to also justify the distributions.