Terminating and establishing a new 401k plan

[Guest WBrown]

Under the circumstances you describe, the employer would have to wait at least a year before starting up a new defined contribution plan. When terminating a 401(k) plan and paying out the balances, there are strict requirements regarding a "successor" plan. See IRC sec. 401(k)(10) and related regs.

[LCARUSI]

In theory, some of your reasons for wanting to discontinue a plan and start a new one might be valid. In practice, I just don't see how it could make sense if you consider the alternatives available to amend the old plan or change service providers.

And let's not forget the work involved to terminate the old plan.

And I agree with WBROWN that you've got the successor plan rules.

[richard]

Can an employer terminate a 401(k) plan, allow employees to rollover their balances into an IRA, and then start a new 401(k) plan?

The employer is continuing operations, and none of the employees have terminated. The employer does not want to freeze the old 401k plan because of maintenance costs.

There are various reasons why an employer might want to do this. He might want to change the investment options, but not want to incur back-end loads (the employees could continue the investments in their IRAs).

Or, there could be problems with the old 401k plan, that the employer would like to be kept separate from the new 401k plan.

Or, there are more generous provisions in the old 401k plan that he would like to eliminate in the new 401k plan.

Anyway, whatever the motivations, can the employer terminate the old, allow IRA rollovers, and start a new?

[Guest Dook]

Since the successor plan rules apply only to the deferral portion of the 401(k) plan, the employer could terminate the old plan, distribute the non-deferral account balances, and transfer the deferral portion only, to the new plan. Maybe that would help acheive some of the goals of a plan termination.

[richard]

What if the second 401(k) plan is established BEFORE the first 401(k) plan terminates? (Yes, in this situation, the employee could defer into either or both 401k plans!)

For example, if the second 401(k) plan is started in March, Year 1; and the first 401(k) plan is terminated in September, Year 1. And, the employees receive their account balances from the first 401(k) plan in October, Year 1, and roll them into IRAs.

Does this avoid the successor plan rules? Any takers?

[david rigby]

I agree with comment about amend rather than terminate. Seems that provisions deemed too "generous" is hardly a reason to terminate.

[davef]

I'm not sure if establishing a new 401(k) plan prior to the plan termination would necessarily help. The successor plan rules also state (albeit in the negative) that if, at all times during the 24-month period beginning 12 months before the termination, fewer than 2% of the employees eligible under the current 401(k)are eligible under the other defined contribution plan, the other defined contribution plan will not be considered a "successor plan." I would interpret this to mean that if the same group of employees was eligible under both plans (i.e., the 2% rule would not be met), then the later established plan would be considered a "successor plan" if it was set up within the 12-month period prior to the termination. If this is not the case, what would prevent an employer from setting up another 401(k) plan one day prior to the termination date of the other plan?

[richard]

I figured as much, but it was worth a shot.