Plan Term

[Guest Rutager]

I have a 401(k) / Match plan that is terminating - it has a 12-31 plan year end. The plan is amended with the purpose to terminate and the sponsor is applying for an IRS determination letter so the termination will take a while to complete. The amendment ceases accraul of benefits as of 06-30-2008 so no new contributions may be made to the plan that apply to compensation earned after that date. However, the amendment does not change the plan year - it reamains 12-31.

Do I perform ADP / ACP non-discrimination testing for the time period 01-01-2008 to 06-30-2008?

If the plan fails the ADP / ACP testing for the 6 month test - when does the correction period for the refunds begin - 07-01-2008?

If the plan failed APD / ACP testing for the 6 month period and refunds had to be issued - is the period to issue the refunds without paying an excise tax the 21/2 month period after 06-30-2008? If the refunds come out after say 09-15-2008, does the employer have to pay an excise tax?

I'm just not sure on the mechanics of running ADP / ACP testing on a plan that is terminating and was hoping someone might assist. Thank you!

[Tom Poje]

1.401(k)-2(b)(2)(iv)(E)(v) contains a clue (possibly)

"...in the event of a complete termination of the plan...correction distribution must be made ASAP...

If the entire account balance of the HCE is distributed prior to when the plan makes a distribution of excess contributions...the distribution is DEEMED to have been a corrective distribution..."

emphasis mine.

Since it is 'deemed' to have been made, that sounds like you are done, but it is sort of vague.

[Tom Poje]

as for what comp to use, I'd hold the fact the plan ceased accruals to be the 'termination' date.

the new 415 regs says. hopefully I have the cites correct, though I am still working on my 'copy' of these.

1.415(j)-1(d)(3) Deemed change of limitation year. If a defined contribution plan is terminated

effective as of a date other than the last day of the plan’s limitation year, the plan is

treated for purposes of this section as if the plan was amended to change its limitation

year. Thus, the rules of this paragraph (d) apply to the terminating plan’s final limitation

year.

1.415(j)-1(d)(2) Application to short limitation period. Where there is a change of limitation

year, the limitations of section 415 are to be separately applied to a limitation period

which begins with the first day of the current limitation year and which ends on the day

before the first day of the first limitation year for which the change is effective. In the

case of a defined contribution plan, the dollar limitation with respect to this limitation

period is determined by multiplying the applicable dollar limitation for the calendar year

in which the limitation period ends by a fraction, the numerator of which is the number of

months (including any fractional parts of a month) in the limitation period, and the

denominator of which is 12. In the case of a defined benefit plan, no adjustment is

made to the section 415(b) limitations to reflect a short limitation period.

as close as I can come for an example:

1.415(j)-1(g)Example 2. In 2008, an employer with a qualified defined contribution plan using

the calendar year as the limitation year elects to change the limitation year to a period

beginning July 1 and ending June 30. Because of this change, the plan must satisfy the

limitations of section 415© for the limitation period beginning January 1, 2008, and

ending June 30, 2008. In applying the limitations of section 415© to this limitation

period, the amount of compensation taken into account may only include compensation

for this period. Furthermore, the dollar limitation for this period is the otherwise

applicable dollar limitation for calendar year 2008, multiplied by 6/12.