Contribution in year of termination

[Guest esi-jht]

I've got my head spinning on this one for some reason. 401k plan wants to make a discretionary PS contribution but they are planning to terminate by 9/2006. My first thought is sure they can as long as they declare the contribution before the plan terminates. Then, I think, no, the declaration isn't made until the end of the Plan Year and the termination will have happened before that date. Can someone clarify this for me?

[Blinky the 3-eyed Fish]

There is no declaration date necessarily. You just need to make sure that the people in the plan have earned the right to the allocation. If there is a last day requirement, then the plan termination will preclude anyone from meeting the requirement and you would need to amend the plan. You should also make it clear what compensation is used for the allocation.

[Guest esi-jht]

OK. In light of the last day rule issue. If the plan termination is treated as a short plan year, wouldn't the date of termination become the new "last day" for purposes of determining who is eligible for allocation?

[JanetM]

As long as you amend the plan to have new year end. You should be specific on covered comp, proration of hours and vesting.

[Blinky the 3-eyed Fish]

The termination date does not in of itself change the plan year end.

[Guest esi-jht]

If the termination in and of itself does not change the plan year-end, then how does your first comment about the last day rule come into play? I'm afraid I'm getting more confused.

[Blinky the 3-eyed Fish]

You can't meet the allocation requirements after the plan has terminated. If you have a last day requirement, 12/31 for example, but the plan terminated in September, well then you have no one that is entitled to the contribution.

Does that help?

[Sully]

Taking the above situation a step further, what if you have a calendar year plan with last day language and it is terminated on 4/30/06. Could the plan be amended after the termination date, but before the plan year end, to remove the last day requirement?

[Locust]

First, termination of the plan in mid-year doesn't create a short plan year. The plan continues to operate on the regular plan year until all assets have been distributed. The effect of termination is to: 1. fully vest everyone as of the termination date, 2. suspend further benefit accruals, and 3. initiate the final payout procedure (assuming that the plan says that payments will be made asap after termination of the plan).

Second, (Sull) you might be able to undo the termination as of 4/30 and set a new termination date, such as 8/1, but there are issues: 1. Everyone would have to be fully vested, I think, as of 4/30. 2. You'd have to count compensation to the new termination date in determining allocatiions. 3. There might be some employee issues - some expectations created by the termination that would have to be considered. If everyone stay employed between the initial and new termination dates, it may not be an issue.