New plan after plan termination

[Guest Achilles]

A client of mine is looking at terminating their 401(k) plan. They hope to re-establish one later on.

Do they have to wait 12 months from the date of termination on their current plan before they can setup another one?

Thanks in advance.

[rcline46]

They must wait 12 months from the date of the last distribution. Why not 'freeze' the plan? And since contributions are from ee money, why not let ees contribute? What harm is there?

[Guest Sieve]

Actually, they could set up a new plan immediately, if they want. It's just that if they do not wait, there then would not be a distributable event under the old plan, so individual distributions/rollovers could not occur as a result of the Plan's termination. And, of course, if distributions are not made from the terminated plan within 12 months, the plan must be updated, as necessary, for required language changes--in addition to any language changes necessitated by the termiantion now.

rcline46's suggestion of freezing the plan makes a lot of practical sense, especially if there is a chance they may want to resurrect the plan later. I have even seen employers freeze employee deferrals but keep the plan in place for potential future use.

[K2retire]

Doesn't freezing the plan effectively terminate it since there are no longer substantial and ongoing contributions?

[Guest Sieve]

If the freeze is for a short period (i.e., 2-3 years), followed by the return of contributions, then the freeze will not be treated as demonstrating a lack of permanence or the discontinuance of contributions.

[Randy Watson]

If the freeze is for a short period (i.e., 2-3 years), followed by the return of contributions, then the freeze will not be treated as demonstrating a lack of permanence or the discontinuance of contributions.

Would that freeze result in full vesting of employer contributions? If so, would that change if the employer established a successor plan?

[Guest Sieve]

That really was K2's question. You do have to be careful that the lack of contributions does not continue for too long, or else there will be full vesting as a result of discontinuance of contributions. I would not extend freeze beyond 2 years, 3 at most.

But, if you continue 401(k) deferrals (as rcline suggests early in this thread), then I'd argue that there is no discontinuance of contributions at all (since deferrals are, in fact, employer contributions).

[rcline46]

A termination of the plan forces 100% vesting! So a freeze keeps the vesting intact and may be a better solution. Vesting is a red herring in this situation.

[Guest Sieve]

rcline --

I disagree that vesting is a red herring in a freeze.

If you freeze contributions of all types under a ps/401(k) plan, and there are no contributions made for a number of years, then, at some point, you ought to have a "complete discontinuance of contributions" (see IRC Section 411(d)(3) and Treas. Reg. Section 1.411(d)-2(d)). And, as the reg states, one of the items to consider re: complete discontinuance is whether contributions are "recurring and substantial" (also dealt with in Treas. Reg. Sectin 1.401-1(b)(2)). Once you hit 3 years with no contributions, I think you should be concerned. That's precisely why the Form 5310 asks for the last contribution date/year, and also a list of non-fully vested terminated participants for the last 5 years.

A freeze of ps contributions (i.e., just not making any), with a continuation of the salary deferrals, should eliminate "discontinuance of contributions" concerns.