Terminating a 401(k) Plan

[Madison71]

I have a couple of questions. A client of mine called and said he wanted to terminate his 401(k) Plan. It is your standard 401(k) plan with a discretionary match, it is not a safe harbor. He has not contributed in many years. His accountant told him he could not terminate the plan until the end of the year because some participants are contributing. The plan document says he can terminate at any time. My understanding is that with a 401(k) plan that is not a safe harbor, you could terminate at any time as long as you make all participants 100% vested. Is this correct? Also, he wants to start up another plan for participants. He is thinking of doing a SIMPLE 401(k) Plan. My understanding is that with successor plan rules, he could start a SIMPLE IRA in the same plan year, but not a SIMPLE 401(k) Plan. Is this correct? Also, my suggestion to him is to terminate the plan and not deal with setting up another because the SEPs and SIMPLEs involve employer contributions (sometimes mandatory I believe with the SIMPLEs) and he doesn't have the cash to make any employer contributions is the near future. Any thoughts there?

Thank you.

[J Simmons]

There is a mandatory employer contribution to a SIMPLE 401k or SIMPLE IRA. The employer has not contributed for years, so it seems odd that the employer would want to go to a plan that would require a contribution from the employer. If the employer is yet SIMPLE determined, then the easiest would be to wait and convert the current 401k to a SIMPLE 401k effective 1/1/2009. If the employer decides to terminate and not start a new plan, then termination does not have to await until the end of the year--the document is right. If the 401k is terminated, the employer may not start a SIMPLE IRA until the first of the next calendar year.

No company contribution required, but employees currently using the 401k. Why terminate it?

[dmwe]

It's not clear but I'm guessing that he wants to terminate the plan because it's costing him too much money. Maybe, if he's not already doing this, have the fees shifted to the participants instead of the employer. Then it wouldn't cost him anything.

It doesn't make much sense to start up a new plan if he doesn't plan on contributing to the new plan either.???

[Guest meeh3704]

If the 401k is terminated, the employer may not start a SIMPLE IRA until the first of the next calendar year.

No company contribution required, but employees currently using the 401k. Why terminate it?

I was wondering why the employer has to wait until the first of the next calendar year to start a SIMPLE? If an employer terminates a 401(k) is there a waiting period before they may start a SEP or SIMPLE? If so, can you please cite authority?

Thanks.

[J Simmons]

"some participants are contributing" to the 401k--the are considered 'employer contributions'. IRC section 401(k)(2)(A) and (B).

Can't have a SIMPLE in a calendar year during to which contributions were made to a qualified plan. IRC section 408(p)(2)(D)(i); IRS Notice 98-4, Q&A B-3 and A-3;

[Guest meeh3704]

"some participants are contributing" to the 401k--the are considered 'employer contributions'. IRC section 401(k)(2)(A) and (B).

Can't have a SIMPLE in a calendar year during to which contributions were made to a qualified plan. IRC section 408(p)(2)(D)(i); IRS Notice 98-4, Q&A B-3 and A-3;

Thanks. My research indicates that SEPs do not have a parallel rule. In other words an er who terminates a 401(k) can immediately establish a SEP. Do you agree?

[J Simmons]

That's an issue I've not faced before. But I suspect you are right.

[Bird]

In other words an er who terminates a 401(k) can immediately establish a SEP. Do you agree?

Definitely. In this case, not much help, since it appears the sponsor wants a plan for employee contributions. But SEPs and 401(k)s can coexist.