Retroactive PS Plan Termination date?

[mschwechter]

OK, so we know about the substantial and recurring deposit rule in 3 out of last 5 for a PSP&T, but we now have a Plan that was submitted for terminaton in 2005 that the reviewer wants us to go back basically to the last year a substantial contribution was made and vest prior terminees who received distributions in the subsequent year.

IE: 2 terminated ee's in 1999 (last year of PS contributon), received distributions in 2000.

Company had a MP/PS combo that was merged in 2000. Company fell on hard times and although intended to resume PS contributions when conditions improved, finally decided to terminate plan in 2005.

Agent wants those 2 partically vested terminees fully vested, in effect going back to a plan termination date of Jan 2000, citing the regs that the termination occurs "not later than" the last day of the following plan year.

I personally think this is a pretty hard line to take. In effect, if we fully apply this logic, we should never make a distribution in a Plan year where the Employer "might not" make a contribution, since we might have to go back and fully vest a paid out terminated employee. Of course, we won't know until the end of the year that the employer cannot make a contribution, so we have to wait for the following year, and have the same problem. Sounds like a catch 22 to me.

Presumably, this agent's supervisor agrees with him. I kind of think that using the 3 out of 5 rule would at least get us out 2 years to the end of 2001.

I have been wrong before, but this seems kind of Rube Goldberg to me.

Anth thoughts?

[Bird]

I agree that it's harsh. Your facts aren't even that bad; as you note, the regs say that a termination occurs "not later than" the end of the year following the last substantial contribution, you had a contribution in '99, so the termination could be as late as the end of 2000, after the payouts. I think I'd hammer that pretty hard, noting the expense of re-doing 5 years of vals that could be charged to the plan.

[Guest mjb]

Hsave you looked at the IRS guidelines for terminating plans, I thought there was an exception from the termination rule if the plan sponsor did not have any profits for more than 5 years as well as other reasons.