Retroactive Plan Term Eff Date and Current Salary Deferred Contributions

[Tinman]

Looking for some type of documentation here to help explain the law to a combative client. Here's the details:

Client sponsors 401(k) plan which has continued to withhold and submit deferrals through 2/2007. Plan sponsor now wants to terminate plan, effective 12/31/2006, and have all 2007 deferrals returned to his employees as a "mistake in fact" in order to avoid the cost of nondiscrimination testing for 2007.

We have told this client we cannot do this - the contributions have been posted to participant accounts and there is no legit reason for a "refund" - that in fact we would be facilitating a prohibited transaction.

Any ideas on best way to "show" this to the client?

[WDIK]

Any ideas on best way to "show" this to the client?

I would use a calendar and a famous tract by Thomas Paine.

[david rigby]

Where is the duly adopted resolution to terminate?

[Guest Pensions in Paradise]

In effect the client wants to retroactively amend the plan to terminate the plan. The retroactive amendment is attempting to take away their 401k deferrals. So show them this:

411(d)(6) Accrued benefit not to be decreased by amendment. --

411(d)(6)(A) In general. --A plan shall be treated as not satisfying the requirements of this section if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in section 412©(8), or section 4281 of the Employee Retirement Income Security Act of 1974.

[Peter Gulia]

An aside: If a concern is the expense of ADP or other non-discrimination testing, perhaps an employer might inform the plan fiduciary that the employer never had obliged itself to pay for that testing, and that the employer won't pay for it. After receiving this information, the plan fiduciary might find that the plan's documents don't preclude the plan from paying expenses of administering the plan. Following this, the plan fiduciary might find that ADP and related non-discrimination testing is necessary to the correct administration of the plan according to its terms, and meets other conditions as a proper plan-administration expense. Then, the plan fiduciary would (if the plan's documents don't provide the allocation) decide the allocation of that expense among participants', beneficiaries', and alternate payees' accounts.

[Tinman]

Thank you! This should work (including the calendar).