Terminating plan missing SH contrib

[TBob]

A 401(k) plan was using the SHNEC up through 2004. For 2005 they amended the SH out of the plan. The 2003 SHNEC was deposited in early 2005 (obviously late) with lost earnings calculated and deposited as well. The owner of the company has refused to pay the 2004 SHNEC that is owed to the participants despite our repeated and well documented attempts to get the $ from him.

Recently, he shut down the company and wants to terminate the plan. We finally convinced him that he needs to deposit the SHNEC before he can terminate the plan (or things are going to get ugly, very soon for him). He would now like to take the money out of his own account in the plan to pay for the missing SHNEC and lost earnings (he has pleanty of money in the plan to cover this amount).

My initial thought was to let him take a taxable cash distribution from his account. He could then turn around and pay it back to the plan. One concern of course is allowing the owner to take a distribution prior to receiving the final determination letter. Particularly, when the plan does have the late/missing SH contributions that will affect qualification. Would you allow the distribution? Other alternatives or concerns?

[austin3515]

If the Plan allows in-service distributions, I can't see why not. The qualification of the Plan is not as much of an issue with an after-tax distribution. If the Plan does not allow in-service, then amend the plan accordingly (assuming the 401(k) restraints won't put the whammy on things).

I think there are probably a lot of issues to consider here though. For example, I'm not certain there is such a thing as a "late safe harbor contribuion." No doubt the Plan gets the money, but I'm not sure the Plan can skirt the ADP test in this scenario. Of course if the owner needs to get cash out anyway, I suppose failing the ADP test is of no consequence (except amending his 1040 from 05, if he's already filed).

[Archimage]

SHNEC must be deposited within 12 months after end of plan year or lose safe harbor status.

[TBob]

We realize that the SHNEC should have been submitted within 12 months of the end of the plan year in order to maintain the SH status. That aside, we also understand that the employer still needs to make the contribution even though it won't satisfy the ADP. Our biggest concern at this point is the employees that were let go when he shut down the company that want their money and are aware that they have not received their 2004 SHNEC yet. Some of them are not pleased to say the least. They aren't going to be very happy either if their distributions are held up for several more months waiting for the determination letter. We can't even start the application process until the SHNEC has been contributed.

Austin - Do the plan's inservice withdrawal provisions really come into play here? Since the owner has shut down the company, wouldn't he be able to take the money as a result of "termination"? Can you do an in-service distribution once a participant is no longer in service? Also, there is no "post-tax" money in the plan. It is all deferrals and employer contriutions (SHNEC and P/S).

[Locust]

You've got a plan administrator and trustee who should be making these decisions. If I were the trustee/plan administrator, I might want the amounts necessary for the missing contribution and earnings to be reallocated directly from the owner's account to the other participants' account,s that is, that this amount not paid be paid to the owner first. If I were trustee/plan administrator, I might hesitate before paying the owner anything until the deficit was made up. [Of course I can guess who the trustee/plan administrator actually is and he might not agree.] Seems like there are some fiduciary issues here.

[TBob]

Locust - Good guess! Trustee= Administrator= Owner= Problem....