De Facto Terminations

[Guest Laura Millwood]

Does the rule that the IRS can deem your plan terminated if you fail to make a contribution in 3 out of the last 5 years apply to 401(k) plans? We have a client whose plan has not had any type of contribution (deferral or employer) in the last 4-5 years. Should the plan be deemed terminated and assets disbursed?

[Guest ESOPwizard]

Without researching the issue, I believe that the IRS does not regard the plan as being terminated but might take the position that there has been a suspension of contributions, which would trigger vesting retroactive to when the contributions were suspended. Therefore, you have a vesting issue, which would be meanignless if the only contributions to the plan were 401(k) contributions.

If the plan has participants who are not 100%, the company should consider making contributions or vesting the participants. Because I don't have all of the facts, I'm not making any specific recommendation.

[KJohnson]

If you decide to formally terminate and distribute assets, watch out for successor plan issues. To distribute assets from a termnated 401(k), the employer cannot currently have another DC Plan or establish one in the twelve months after assets are distrbuted from the 401(k).