Money Purchase Plan Term mid year

[Guest NeophiteTPA]

An employer has a Money Purchase Plan and a 401(k) plan without a Profit Sharing option. They terminate the MPPP at 6/30. They add a PS option to the 401(k) plan at 7/1.

MPPP has immediate eligibility; age 21; no last day req.; 1000 hours to receive a contribution. Contrib formula is 10.4% of base comp plus 5.7% in excess of TWB.

PS has age 21; 1 hour of service; enter 1/1 and 7/1; requires 1000 hours to receive a contribution; contribution is integrated with TWB. Uses participation compensation for PS allocation.

Should MPPP and PS allocations and eligibility be calculated totally independently? If a participant doesn't reach 1000 hours before 6/30 - then no MPPP contribution? If the TWB isn't reached either in the first or in the second half of the year, then no excess contribution?

Is there no pro-rating of the TWB or the hours like you would with a short plan year?

Is this above an unintended consequence of terming the MPPP rather than merging it into the 401(k)? It seems that the contributions calculated separately are lower than they would have been had they received the MPPP on the full year or the PS on the full year.

Any assistance in helping me understand what is going on here would be appreciated.

[Ron Snyder]

Of course, what they should have done is much easier. They should have: (1) zeroed out the MP formula by amendment prior to completion of 1,000 hours by the participants; (2) merged the MP into the PS/401k plan; (3) replaced the MP with a PSP 3 years ago when the law changed, etc.

However, if the facts are unalterably as you present them:

Q1. Should MPPP and PS allocations and eligibility be calculated totally independently?

A1. Yes, the MPP and PSP contributions are independently calculated.

Q2. If a participant doesn't reach 1000 hours before 6/30 - then no MPPP contribution?

A2. It depends on what you mean by "terminate". I would have to see the documents, but the result you propose is possible.

Q3. If the TWB isn't reached either in the first or in the second half of the year, then no excess contribution?

A3. What is the first or second half of the year? Is 6/30 the 1st half or 2nd half? If TWB isn't reached by 6/30 it is possible that no excess allocation is required, again depending on the language of the termination documents.

Q4. Is there no pro-rating of the TWB or the hours like you would with a short plan year?

A4. Is this a short plan year? That omitted fact may change the outcome, but generally it's only limitations that are pro-rated for short plan years.

Q5. Is this above an unintended consequence of terming the MPPP rather than merging it into the 401(k)?

A5. Yes. It would have been much cleaner to merge the MPP into the PS/401k plan.