terminating a PS plan to start a 401k

[Santo Gold]

A client has a profit sharing plan. The old owners sold the business to a new owner. New owner wants to continue with the plan as is, except add a 401(k) provision. As a result he strongly believes that he should terminate the existing PS and start a new 401k, effective 1/1/08. While this is obviously unnecessary, isn't it also not permitted to terminate a PS plan, only to start a new one (with or without 401(k)) immediately thereafter? Something about the potential to abuse this situation to initiate a termination allowing for distributions, only to start another plan immediately afterwards?

Thanks

[Larry M]

If client is concerned about language in old plan, why not persuade him to amend the plan in its entirety (as opposed to just adding the 401(k) provisions?

[Santo Gold]

What the new owner is really concerned about is whether there were any problems in the past that the old owner may have done nothing about. He sees it that if something was done incorrectly in the past in this plan, he is more liable if he continues it, rather than if he terminates it and starts a new plan. I don't think terminating changes anything and also think he may not be able to start a new plan that easily.

[Larry M]

If he terminates the old plan, all the employees become 100% vested and have the option to have their accounts distributed to them as soon as termination is final.

If he terminates the current plan and asks for a determination letter, and if IRS audits and finds errors, who picks up the tab? Current owner or previous owners?

If company was sold and new owner is in place - he may be stuck with past sins anyway.

[Guest mjb]

1. did the owner have counsel conduct due dilligence of the plans qualified status before purchasing the company.

2. does the owner obtain an indemnification agreement from the prior owner before purchasing the company that would protect him if theplan was not qualified?

[Santo Gold]

1. did the owner have counsel conduct due dilligence of the plans qualified status before purchasing the company.

2. does the owner obtain an indemnification agreement from the prior owner before purchasing the company that would protect him if theplan was not qualified?

It turns out that the new owner was actually a minority owner for the past few years, owning around 20% of the company. So, with the old owner wanting out, the 20% owner bought his 80%.

I don't know whether due diligence was done and I doubt he has a signed indemnification agreement.

Regardless of whether there are problems in the past however, could they terminate and then start a new, identical PS/401(k) Plan immediately afterwards?

[MSN]

I don't see why they could not terminate a PS plan and subsequently start a 401(k) PS if they really wanted to, but I also don't see where this is more advantageous to the client than simply restating the current plan.

[Kimberly S]

If he was a minority owner, he is already liable. What is the advantage of terminating?

[Santo Gold]

I think I found what I was looking for. When a 401(k) plan is terminating, 401k contributions cannot to be distributed if a successor plan is established/maintained by the employer. This would be for the period as of the 401k plan's termination date and for 12 months after distribution of all 401k plan assets.

This really is not the situation that I have here, which is a PS plan and the owner wants to terminate and start a 401(k), with presumably identical PS features.

So, the owner can do this, but then it comes back to whether it solves anything, and I think the answer to that is still "no". I would agree with KimS - as an owner of the company in the past, he is still liable. Whether he terminates the plan or amends it into a 401k, that liability is still there.