changing plans

[Guest stlewis]

My firm wants to change from a 401-k plan to an SEP because of massive downsizing. The 401-k admin says that since the plan was funded in january and february of this year <2006> it can't be cancelled. I am trying to confirm this as it doesn't make sense to me. I want to know if the plan can be cancelled and if a SEP can be funded by april 2007 with allowable contributions, and also if there are terms or conditions I should know about concerning rolling the 401-k's into seperate SEP's. thanks.

[Bird]

Legally, the plan may be terminated at any time and your company could in fact start a SEP for 2006 and fund it in 2007. However, they may have good (practical) reasons for not wanting to maintain two plans for one year. For one, the SEP would have to cover the whole year, so there might be some overlap. From an administrative standpoint, there's not much difference between terminating a 401(k) plan in February vs. some later date; a full tax return has to be filed either way, so they might be figuring it's just as well to keep the 401(k) for this year and start a SEP in 2007. (Although if they're looking to save on admin fees they might want to terminate the 401(k) early enough in 2006 to complete the payouts in 2006 - any money left over and paid out in 2007 will require a 2007 tax return to be filed.)

[Nate X]

I think your 401(k) admin maybe thinking that you want to terminate the employer contribution as oppose to a Plan Termination (i.e the plan has a non-discretionary employer contribution, no accrual requirements, and you do not terminate the plan).

If they are referring to a Plan Termination, then they're probably on crack.