Can a plan distribute all plan assets, terminate and then immediately start a new plan ?

[Guest Moe Howard2]

A profit sharing plan currently exists. Neither the employer nor employees are pleased with the TPA, the investments, the broker, nor the fact that there is no 401(k) feature. It uses a prototype plan document of the broker. The employer and employees want a 401(k) plan.

The employer has located a new TPA/ broker which offers a 401(k) prototype and of course investments. The new broker's investments are more profitable than the current broker's.

The employer was told that if he wanted to switch to the new TPA/ borker's plan, the employer would have to amend (or restate??) the current plan and move all plan assets to the new broker.

The employer however would like to terminate the current plan, distribute (or rollover all assets) to participants and then immediately adopt a new plan (401k)with the new broker.

All participants are already 100% vested in the current plan.

Is it legal to terminate a plan, distribute all assets, and then immediately adopt a new plan ?

[JanetM]

You would have to wait more than 12 months from distribution the assets to avoid successor plan rules. 401(k)1(d) is cite - I think.

Why not just transfer the assets to new broker with new plan and be done with it.

[QDROphile]

Someone is overestimating the difficulty of amending the plan and transferring assets to new arrangements and underestimating the negatives of plan terminations. Yes, it can be done, but be careful what you ask for.

[Belgarath]

Successor plan rules aren't an issue here - that's for distributions FROM a 401(k) plan, which isn't the case here. Agree that an amendment and restatement is probably the way to go. As far as termination and distribution, then subsequently establishing another plan - the employer needs a valid reason to terminate the existing plan. This is a facts and circumstances determination, but I haven't heard much about the IRS giving people a hard time when another plan is being established. Others may have different experiences/opinions. I'd particularly be careful if plan expenses for a termination are being paid from plan assets - as a fiduciary issue, I wouldn't generally think this is terribly prudent when a simple amendment and restatement can be done. But have them talk with legal counsel.

[JanetM]

Belgarath, opps you got me there. Current plan is profit sharing plan not K plan. I kind of jumped the gun.

Moe, the employer would adopt the new brokers plan and trasfer assets. Take heed of Belgaraths warning. If the assets are distributed and the there is no "business necessity" for the termination the IRS could see the plan as never having been qualified. It is all facts and circumstances.

[Guest Moe Howard2]

What are some valid reasons for terminating a plan and immediately adopting a new plan (or at least what the IRS would consider valid) ?

I would think that terminating a plan, distributing all assets, and then adopting a new plan ..... is basiclally an in-service distribution. Under what circumstances would the IRS allow such a thing ?

[Belgarath]

I think this is generally not a problem with profit sharing plans, as a profit sharing plan can allow in-service distributions after 2 years anyway. You'll notice that I'm careful to say "generally" as the one thing I've learned in this business is that there are few absolutes!

For pension plan, take a look at the IRS form 5310 instructions. As I said, if they are establishing a new plan, I wouldn't normally expect a problem, but the old "facts and circumstances" could rear its ugly head in some situations, I suppose.

[Guest Moe Howard2]

So does anyone have any examples of some valid reasons that IRS has accepted for terminating a profit sharing plan and then immediately adopting a 401(k) plan ?

[mbozek]

Employee dissatisfaction with the current plan is an acceptable reason but I dont think it is necessary to teminate the plan insted of adopting the new plan and transferring the assets to the new custodian. Some custodians prefer that the former plan be terminated because of admin issues in taking on assets from a former plan e.g., determining that is its qualified so they want the plan sponsor to incure the cost of termintion.

[WDIK]

The employer however would like to terminate the current plan,  distribute (or rollover all assets)  to participants  and then immediately adopt a new plan (401k)with the new broker.

What is/are the underlying reason(s) that the employer wants to terminate rather than amend and restate?

If it is to allow participants to get their money, why not allow inservice distributions of profit sharing money under the terms of the amended and restated plan?

Has the plan been administered so poorly that there are issues the employer is trying to deep six? If so, the issues are deeper than termination vs restatment.

Has misinformation or lack of information led to the employer's choice? If so, an appropriate amount of communcation could help remedy the situation.

Does the owner suffer from acid reflux? There are a variety of prescription and over-the-counter medications that could help.

I would ask WHY?

[PMC]

Saw this and just wanted to know if 1.401-6 (b) comes into play in these situations.

[JanetM]

1.401 and referenced 1.381 refer to plans and assets that transfer between sponsors. The OP says they want to pay the participants out and then start new plan.

[Locust]

The issue is "permanence" - a condition of qualification is that the plan must be intended to be permanent when established and if it is terminated shortly after it is established, this indicates you didn't have that intent, so if you do that you'd better have a good reason to do so (other than wanting to get the money). The idea is that you can't set up a plan to get a deduction for a profitable year and then terminate it in the next plan year (or so) - of course this rule dates to a period before the 10% penalty on early distributions.

You probably don't need a good reason if the plan has been in existence for a while.

With that said, it's a bad idea to terminate the plan just because your new TPA doesn't want to go to the effort of adding 401(k) features.

[Guest mjb]

Saw this and just wanted to know if 1.401-6 (b) comes into play in these situations.

1.401-6 does not apply to ERISA plans. It only applies to church and govt plans exempt from ERISA.