Determination letter or not?

[PAL]

I know this topic has been out here before but I wanted to get everyone's current thoughts...

A compnay that sponsored a small 401(k) plan (30 participants) was puchased in an asset acquisition. All employees were terminated on the date of acquisition. When the (prior) owner authorized that the assets be distributed to the terminated employees, the bank trustee refused and said it was their internal policy to require a determination letter on the termination. The owner states that the plan does not have any compliance issue: 401(k) and 5% employer contribution for all, deposits made timely, plan document updated correctly (including amendments to terminate plan and distribute assets), 5500's filed properly, all annual testing done as required.

Since the company no longer exists there is little desire to go through the added expense of a determination letter and the participants all want their money since they are now unemployed. The owner is considering setting-up a new trust account, transferring the money and making the payments himself (including doing the tax withholding and 1099). The current trustee is fine with this. The question is what are the draw backs in not getting a determination letter? Are you at higher risk of IRS audit? How would the IRS even know that you terminated the plan without getting a determination letter since I don't see that question on the 5500 anymore? Finally, what is the trun around time for getting a determination letter?

Thanks in advance for your thoughts on this.

PAL

[Guest Sieve]

Turn around time varies, but, including time for responding to the inevitable IRS request for information, you should expect about 4-7 months (in my experience, that is).

The IRS has threatened to increase audits for plans filing final Forms 5500 who do not come in for termination FDLs, but I haven't seen any evidence of that, yet (probably because the IRS has not developed cross-checking for the necessary databases).

The downside of not getting an FDL on termination is the same as for an ongoing plan not obtaining an FDL at adoption or amendment/restatement--potential disqualifiction on audit, and disallowance of any rollovers--but that assumes that there are deficiiencies. Would that happen if deficiencies (language of operational) were discovered on audit? Very small likelihood, because IRS probably would allow correction (although at a higher cost than under EPCRS or when discovered on an FDL application).

I always tell individual owners who have large accounts in the plan that an FDL at termination is simply an insurance policy for the protection of the rollover.

[david rigby]

I see terminations of employment, but not termination of the plan.

Which is it?

[K2retire]

We've been hearing rumors of 1-2 year turn around for these letters. Where I work now our clients rarely apply. Where I used to work they always did. The difference in philosophy is related to the complexity of the plans offered: a cross tested plan with assorted exclusions by job classification is more risky than a pro-rata profit sharing contribution with no exclusions or allocation conditions.

[J Simmons]

I see terminations of employment, but not termination of the plan.

Which is it?

I agree with david rigby. It sounds like all the EEs in the plan have terminated employment, and would be entitled to distribution of their benefits. Is that what the bank trustee is refusing to do?

[PAL]

Thanks for the feedback. And it is both: all of the employees terminated and then a resolution to terminate the plan was made. I actually found it quite shocking that the trustee refused to pay out the terminated employees. The initial request for distribution of the termination payments happened around June of last year. Because everyone is 100% vested, that would have resulted in a distribution of all funds and trustee refused. The (original) owner/plan sponsor then had the termination amendment done and the trustee still refused saying their policy was to require a determination letter for plan termination. He has gone around and around with this and just wants to get it closed out.

Based on what I've gotten from the plan sponsor and what I'm seeing here, the plan sponsor has several things to consider:

1. There are some fairly large balances (33 employees/ 10 million in assets) in the plan and that strongly points towards getting the determination letter. The plus is that a determination letter will provide assurance that the amounts distributed are eligible rollover distributions not subject to tax. The minus is that a determination letter will take anywhere from 4 mo - 2 years and could involve a lot of work including back and forth with IRS agents that may not know what thay are looking at and that may repeatedly request copies of stuff you've already sent.

2. On the other hand, in September of last year, the assets were all liquidated and moved to a money market investment (which is probably better then if they had been left invested in mutual funds but no one knows what the future holds) so the plan sponsor has exposure related to the investments, there are all of those people, many that are still out of work and because they are terminated not distributing their balance to them is probably a violation of the terms of the plan.

Does that about sum it up? Of course, this is all based on what the plan sponsor is telling me and we know how that goes...

Thanks again.

PAL

[david rigby]

2. On the other hand, in September of last year, the assets were all liquidated and moved to a money market investment (which is probably better then if they had been left invested in mutual funds but no one knows what the future holds) so the plan sponsor has exposure related to the investments, there are all of those people, many that are still out of work and because they are terminated not distributing their balance to them is probably a violation of the terms of the plan.

Would a DL have any bearing on this issue?

At any rate, getting a DL is (almost always) a good idea.