Future Plan Termination

[DP]

I have a medical practice who has a Profit Sharing plan with a 5/31 year end. On 5/16/05 the president and sole shareholder decided the company was insolvent and decided to close the practice. He terminated the two other doctors on 5/31/05 who are only partially vested in the plan.

The president is keeping the corporation open for a few more months and allowing three office girls to continue working to finish filing insurance claims and collect any receivables. The PS plan has not officially been terminated and probably won't be terminated until the corporation dissolves.

Considering what has happened, should the two other doctors (HCE's) become 100% vested?

If not, there will be approximately $30,000 - $40,000 in forfeitures to be shared among three office girls. What would happen to the forfeitures that couldn't be used? Does it revert back to the corporation?

Thanks.

[wmyer]

This may be a partial plan termination, in which case the 2 doctors would become 100% vested. If you terminate two people and only have six employees total, you are terminating 33% of your staff. Partial plan termination is a facts-and-circumstances scenario, but termination of 20% or more may be considered a partial plan termination. Assets in a DC plan shouldn't revert to the employer; it would violate ERISA's exclusive benefit rule.

[Blinky the 3-eyed Fish]

Of course if the doctors aren't paid out until after the plan terminates, they are definitely 100% vested. If they are paid out before the plan termination and at less than 100%, it would be very prudent to seek an IRS review.

[david rigby]

Partial termination is always a facts and circumstances analysis. With the facts presented, I would conclude YES, but it is useful to remember that other facts could be relevant.

[mbozek]

On the practical side the forfeitures are best used to provide additional benefits to participants on a nondiscriminatory basis since reversions are subject to the 50% excise tax under IRC 4980 as well as ordinary income tax to the employer. There is case law in which termination of employees because of economic necessity or change in business circumstances does not result in a partial terminaton. Need to consult with counsel.

A reversion of excess DC assets to the sponsor after allocation of surplus to participants accounts upon plan termination does not violate ERISA since forfeitures cannot be allocated in excess of the 415 limits (42K). IRS allows reversion after the 415 limits have been reached. Reversion usually results in the excess being reverted to the IRS unless a sucessor plan is established with the surplus assets.

[Blinky the 3-eyed Fish]

It would be exceedly cheaper and more practical to not consult with counsel and consult directly with the IRS via the submission process.

[mbozek]

IRS has ignored court precedents in termination cases that it does not like. Fact that the advice is cheaper does not does not mean that it is correct.

[david rigby]

As stated many times, the least expensive route may be to award the 100% vesting. However, it may still be advisable to discuss with counsel what would be the best mechanism and timing for this.

[Blinky the 3-eyed Fish]

Asking counsel as a first step is a waste of money unless they are prepared to guarantee no extra costs will arise should the IRS challenge their opinion.

[mbozek]

The IRS will be required to provide substanital authority for their position if they believe that vesting is required in this situation. IRS agents tend to back down when they are asked to provide cites. If you think that the IRS will prevail how about a citation.

[Blinky the 3-eyed Fish]

Who is talking about prevailing? I am talking about asking them first. They may give you the answer you want.

Let's say you want to know if you can have a cookie. You could hire a team of consultants to draft a very expensive persuasive argument in an attempt to get the cookie or you could just ask the person who has the cookies. Let's not put the cart before the horse now. That cart costs way too much.

[WDIK]

So if you don't want to get your hand caught in the cookie jar, a carrot works better than a stick.