To terminate or to freeze 401(k) provisions in mid year?

[Guest Alex Calin]

Re; PSP/401(k). Employer wants to terminate 401(k) part in mid year.Questionis; to terminate(& amend the adoption agreement etc.) or to freeze 401(k)&401(m) provisons and let each participant acct. with the investment provider until a distribution event?

Thanks for help.

[M R Bernardin]

In terminating the 401(k) portion, you can't distribute the accounts, because the profit sharing portion will be considered a successor plan.

[Guest AlCal]

I know deferral accts can not be distributed until termination of employment or other qual. event. My question is: should terminate or freeze the 401(k)/401(m) provisions? Any opinion? Thanx.

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[Guest Dook]

If the employer does not intend to contribute anything further to the plan then they should not rely on just amending out the 401(k)/(m) provisions. The IRS will then consider the plan terminated at the close of the plan year during which contributions were last made. If they are interested in preserving the assets in the plan until a distributable event, they should consult with an attorney who can advise on converting the plan to a wasting trust.

[Guest Alex Calin]

The Employer will continue making annual contributions to the Profit Sharing.My question adresses the termination either by removal of the 401(k)/(401(m) provisons or by freezing of same. And if we remove the 401(k)provisions...what to do with the participants' assets. It seems to me that freezing through a simple amendment makes more sense. Any opinons? Thanks.

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[This message has been edited by Alex Calin (edited 04-25-99).]

[Dan]

Alex, I am not sure exactly what 'terminate ... 401(k)& 401(m) provisions' means, exactly. I do not know how a portion of a plan can be 'frozen' or 'terminated'(my ignorance on parade or perhaps my pension vocabulary is limited). I thought those were both all or nothing options (exotic plan needs excepted).

However I recommend amending the plan to cease accepting deferral contributions to the plan. The deferral (and match) contributions are no longer part of the plan operation. That appears to be the desired end, to which your question was posed.

[This message has been edited by Dan (edited 04-27-99).]

[Guest gpr]

Why does the employer want to freeze or terminate the 401(k) portion? Does the employer understand that they can do a discretionary match instead of a fixed match (this way, it can tie into cash flow [not necessarily profits] yet still encourge participation in the 401(k) portion)? Does the employer think the cost of the plan will significantly decrease if these features are terminated or frozen (it probably won't)?

I would recommend getting a complete understanding of these issues before going ahead with terminating these features.

[Guest Alex Calin]

We are going circles around the question. The employer wants to terminate 401(k) provisions for other reasons that costs. And the match is discretionary. Istill do not know if the 401(k) provisions should be eliminated(terminated) or frozen. Thanks.

[Guest gpr]

My point in asking about why the employer wants to do this is coming from a consulting angle.

Can you legally freeze these options (no new additions, but continue to allow employees to direct investments) mid-year or at any other time? Yes. Can you split the plan into two plans, one frozen and the other active? Yes (but why bother). However, provisions of a qualified plan are generally expected to be on-going when established, and it may truly not be in the best interest of the plan sponsor to freeze them. Particularly a 401(k) provision.

For example, let's say the employer is a small company with a single owner. Let's also say that the non-highly compensated employees contribute at such a low level that the owner has to get significant refunds each year. He's a little on the hot-headed side, and after the most recent refund, yells at his administrator and tells him to kill the provision - if he can't have all of it, then neither can any of the employees. The administrator is scared of losing his job and jumps to give the owner what he's asked for and kills the 401(k) provision. The employees who were actively contributing (and enjoying the current tax benefits of deferrals) get upset, and quit to go work for a competitor who still offers a 401(k) provision. The owner now has a difficult time hiring new high-quality employees because he doesn't have a 401(k) provision. This employer might have been better off changing to a safe-harbor plan, or adding a non-qualified plan.

I don't know your specific circumstances or demographics, but the scenario I've outlined above does happen and could be handled better. So, again, I recommend having a complete understanding of why (and you may already know this and just haven't stated so) before you terminate a plan provision, and particularly a 401(k) provision. My long-winded two cents - take it or leave it. If the scenario above does happen to mirror what's going on and you would like recommendations for dealing with the hot-headed owner, let me know.

[Guest Alex Calin]

Do, if 401(k) provisions eliminated(terminated)don't we have to distribute participants' accounts? Whereas if frozen, it seems that the accounts can "stay in place" until termination of employment.

I think of an amendment such as:

"Notwistanding anything to the contrary in this plan document or adoption agreement, the 401(k) and 401(m) provisions of this adoption agreement shall be frozen effective mm/dd/yy, with no further accruals."

Any other comments welcomed. Thx.

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[Guest Do]

Alex, it doesn't matter. If you terminate, you won't have to test for 410(B) under mandatory disaggregation. If you freeze you do; however, the ratio percentage is either the same as it was before the freeze or it is zero because no nonexcludable HCEs benefit from it. If you are amending soon for GUST and you don't think the employer will want to unfreeze salary deferrals, terminate so that you don't have to put in the new ADP/ACP refund rules, definiton of HCE, no rollover of elective deferral, and so on. Does that help or we still going around in circles?

[Guest Do]

Alex: No, I don’t think terminating the 401(k) and (m) components of the plan constitutes a plan termination because the plan still exists with psp component. I suppose there is an argument that the public policy consideration for mandatory disaggregation (whatever that is) is the basis for treating the 401(k) and (m) components as separate plans and termination of these components is termination of a separate plan. However, with an argument that termination of the 401(k) component is tantamount to a plan termination, the psp plan document is a successor plan that precludes distribution of elective contributions. I would be careful about freezing everything related to 401(k) and (m) because there are provisions making corrections such as excess deferrals and excess contributions which you may want to take advantage of after the date on which you want deferrals and matches to stop. A wholesale freeze would freeze these correction provisions, not to mention possibly hardship distributions, rollovers, transfers, loans and loan payments.

[Guest bswift]

alex, if you're still on the quest for an answer, it is in the collection of posts, but maybe i can help. It may not matter whether you "terminate" or "freeze" the (k) and )m) portion of the plan because in either event you can't distribute assets. Freezing the plan certainly wouldn't qualify as a distribution event and neither will termination because of (k)(10)(A)(i). However, one issue that comes to mind is that you probably have to also fully vest the match. If I were you, I'd probably just amend the plan to provide that no deferrals can be made after a certain date and wait for some other distribution event to distribute. hope that helps.

[Guest Alex Calin]

bswift...I think this is the answer I was looking( and hoped for).

Please take a look at the next question I'll post under Cross Tested Plans Topic. Maybe you can help. Thx.

[This message has been edited by Alex Calin (edited 05-05-99).]