401(k) plan terminated 1 year + but assets not yet distributed

[jlea]

Okay - so bd voted to terminate plan effective 2/07 (all contrib ceased, service accrual ceased, accts fully vested, take all actions to effectuate). Began process of terminating.

Lots of missing participants (high turnover of NHCEs, plan had auto enrollment feature) and plan's still going through steps required to try to locate.

Here's where I was brought on board.

So, as I see it, here's where we are:

1) gotta continue to take req'd steps to locate missing participants (and, yes, I've read past posts on that topic!)

2) under Rev Rul 89-87, plan may not be "term'd" since distrib of assets took longer than 12 months after term date. I'm investigating to see exactly why taken so long, to see if we have any argu re the process was still "as soon as admin feasible."

3) plan needs to be brought into compliance with req'd amendments to date. Prob untimely amender; need to consider EPCRS (file VCP submission and 5310 at same time).

which brings me to 4) this plan, I believe, is a standardized prototype. I don't believe they filed for a D letter before. Any reason they should file for a termination letter? (except, perhaps, to address the issue of whether the distrib of assets was timely.)

5) what about the plan needing to be amended when Bd action has occurred to terminate? Should Bd take action to rescind the termination vote, recharacterize as cessation of contrib - which would be at least a partial term - but from analytical perspective, does that clean up its amending the plan now?

[Bird]

I think, in this instance, that the primary consequence of failing to distribute assets within one year is that your document will probably need additional amendments for law/regs that became effective in the meantime. If it's a prototype I'm not sure that it's an untimely amender unless you know of something that was missing originally.

I guess a 5310 filing now would provide cover to assure that what you're doing is ok, but I don't know that anything so bad has happened. I've grown skeptical of the benefits of 5310 filings, at least in relation to the costs.

[John Feldt ERPA CPC QPA]

Bird, are you indicating that you've had some successful audit result for times when the IRS audits your terminated plans, even though those plans did not submit a form 5310?

[Bird]

I haven't had any audits of terminated plans where we didn't file a 5310 (knock on wood), but I did have an audit of a plan where we had filed a 5310 and I felt that having the DL on termination was of no help at all. I understand that a 5500 audit is going to focus on operational issues, and the 5310 filing is going to focus more on document issues, and maybe I was being unrealistic, but it just left a bad taste in my mouth, having told the client that there was a big advantage to filing the 5310, but then having to still ask the client to root around in an old storage warehouse 3 years later (the company itself was out of business) for a bunch of useless records. With the cost now at $1,000 (and I work mostly on small plans), that is a very real expense with questionable value, IMO. We use volume submitter plans, don't make any changes from pre-approved language, and adopt good-faith amendments for any laws or regs that become effective prior to termination. I'm prepared to say "go for it" if the IRS wants to DQ a plan because we used the word "and" instead of "or" in some dumb amendment that doesn't mean squat anyway...at least in a plan with $100,000 of mostly participant money; I know they don't want to do that. Now if it's a $1,000,000 plan and that's the owner's money, we're almost certainly going to get a DL. In between is where it gets interesting.

[jlea]

So far I have not been able to locate any additional facts to support the assertion that the twenty-month period for asset distribution was as soon as administratively feasible. I agree that the most prudent action at this point is to amend the plan to bring it into current compliance.

Here are my current questions:

1) What are the consequences of the Board voting to "re-terminate" the Plan, as it were? Seems then we'd have a new termination date. Aside from amending the Plan to current compliance and filing additional 5500s (which, thankfully, the employer's been doing), what are the consequences of having a new termination date (which seems a natural corollary to re-terminating the Plan)?

2) How would the (potentially) too-lengthy distribution period become an issue? Is it only on audit? And if it is challenged on audit, but the Plan was amended to bring it into current compliance, and 5500s were filed for the additional Plan Years, then what? What risk do we run?

3) The corporate parent wants to roll out a new 401(k) plan, effective 1/1/09. I do not know yet whether the employees within the terminated plan will be eligible to participate in the new Plan. If they (or at least 2% of them) are, however, then the employer would have had an alternative defined contribution plan, such that 401(k) money should not have been forced out of the terminating plan. Any problem with (a) rolling out the new plan but excluding this subsidiary's employees and then (b) amending the new 401(k) plan more than 12 months after terminating plan's final asset distribution to let this subsidiary participate in the new plan?

Many thanks for your thoughts.