De Facto Plan Termination

[Guest PBJ]

Is there such thing as a de facto plan termination? If so, how does it work?

[david rigby]

Maybe. It depends.

Seriously. A few more facts, please.

[Guest PBJ]

Oh -- this is a messy situation, and I am afraid that I may be opening a can of worms. Ok so here goes:

an employer sponsored a 401(k) plan for a number of years - there were only two people participating in the plan - the owner and another participant. In 2001 the one participant's account was distributed. Let's assume she terminated and received a distribution. The remainining account (the owner's) remains in the plan. Between 2001 and 2007 nothing has been going on the plan...no contributions, no distributions, nothing...not even plan updates. In fact the owner has been in significant financial difficult's for those years Good news: the Forms 5500 have been filed.

The question was raised of whether the employer can say that the plan was terminated in 2001. I have never seen something like this. My thought was that it was not employer who used to cry de facto termination but rather the IRS. And I don't even know if that still happens. In any event, the employer would like to wind up the affairs of the plan as best it can. De facto termination was raised to do so. I have no idea...

[FormsRstillmylife]

You cannot advise the owner that this would be OK. Sure, maybe he can roll to an IRA, do a final 5500, and never hear from the IRS again; but there is no guarantee. If the IRS sees this, it will want that current plan document with all the timely amendments. It will wonder why there was no compliance program submission to cure the missed compliance amendments at the cheap rate. It will happily disqualify the plan as of the first year an amendment was required with interest. An ERISA attorney will be able to talk them into a lesser penalty in exchange for his fee, but why go there.

De facto terminations are for the PBGC and IRS to find when resolving abandoned DB plans. When the owner still exists and has managed to file 5500s, they will not find a de facto termination.

[Bird]

I think a plan can be de facto terminated when substantial and recurring contributions have ceased, but it doesn't mean much except 100% vesting. As long as the plan has assets, it must continue to file returns (which has been done) and maintain a current document (which apparently hasn't). For that matter, a plan which has officially terminated by written resolution (I guess we can call that a de jure termination?) must do the same, as often happens when a plan is "terminated" in one year and completely distributed in a later year.

So, no, I don't think this plan can slip quietly into the night.

[Guest mjb]

There are IRS rulings that state that S & R allows NO contributions for 5 yrs- longer periods are permitted if the er has no profits. Need to update plan for GUST EGTRRA, ETC. Check to see if plan was automatically amended for gust by ptype sponsor.