Can A Profit Sharing Plan Continue Once The Employer Retires?

[Guest fairira]

I would very much appreciate if someone knowledgeable about qualified retirement plans could please comment whether an owner-employee Profit Sharing Plan (PSP) with 4 Trustees can be continued after the Employer retires without incurring IRS disqualiification. In an effort to be helpful, specific information follows re this Employer and the PSP.

The Employer is a sole proprietor and is the only PSP participant and plan beneficiary (i.e., no other employees). To provide continuity and permanence of administration, the PSP has 4 Trustees who are individually fully empowered to act on the plan and who can continue to maintain the the PSP and Trust after the Employer’s retirement and who can terminate the PSP if the Employer dies and can distribute any PSP assets to the Employer’s designated beneficiary(ies).

The Employer has had a PSP since 1963. His current plan is a self-trusteed Vanguard prototype PSP, maintained since 1992 (including GUST amendment in 2002) with annual filings of the 5500-EZ except in 2007 and 2008 since the PSP assets were less than $250,000. He has taken annual Required Minimum Distributions since age 70-1/2 and is now retired.

In the 2009 Vanguard Plan Adoption Agreement (to amend the plan for EGTRRA), the box was checked for a “Frozen Plan” after which is printed: “The Employer has discontinued all further contributions to the Plan. The Employer and the Trustee will, however, continue to maintain the Plan and Trust in accordance with the requirements of the Internal Revenue Code.” As part of continuing plan maintenance, the Employer is about to submit the Vanguard PSP amendment for the Pension Protection Act of 2006 and the Heroes Earnings and Assistance Relief Tax Act.

Recently, he was told by a compliance officer at Vanguard that (1) the IRS considers any plan without an Employer currently operating a business to be an “orphan plan” and that a plan needs to have “continuity and permanency” (which I would think may be met by having several plan Trustees) and (2) that the IRS has often ruled that a PSP whose contributions are frozen is effectively disqualified since there are no longer “substantial and continuing contributions” (and yet Vanguard offers a choice of “frozen plan” or of discretionry contributions in its PSP adoption agreement).

This Employer would like to keep a PSP for several reasons, including that his beneficiaries can choose to take their distributions as either a TIRA or RIRA, that he can include a survival contingency feature not available on an IRA, and that reasonable plan expenses can be paid by the PSP.

Thank you for your comments re if this owner-employee can continue using a PSP after retirement without disqualification risk If so, he would adopt a master and prototype plan or volume submitter plan with the curent 4 Trustees since Vanguard is discontinuing its PSP.

[PensionPro]

IRC §401(a) requires a qualified plan to be sponsored by an employer (or employee organization). If the sponsoring employer is no longer in existence, the plan ceases to be a qualified plan. The plan becomes an orphan plan.

However, the mere fact that substantial and recurring contributions are not being made to a profit sharing plan does not disqualify it. It experiences a partial termination.

[jpod]

Highly technical position, but I would agree with Vanguard that you can't have a QP if there is no longer an employer, which in this case I guess would mean the sole proprietor is no longer filing a Schedule C with any numbers on it. Aside from that, I don't know what "TIRA and RIRA" means, but this seems like an awful lot of trouble to keep a plan alive that has less than $250k in it. Also, I don't know why his estate planning objectives vis a vis the profit sharing plan money cannot be accomodated through a specially drafted IRA trust agreement. If Vanguard won't serve as IRA trustee under a specially drafted trust agreement, I'm sure he can find an eligible IRA trustee that will so serve.

[XTitan]

Aside from that, I don't know what "TIRA and RIRA" means, but this seems like an awful lot of trouble to keep a plan alive that has less than $250k in it.

Traditional IRA and Roth IRA?

[masteff]

that he can include a survival contingency feature not available on an IRA

Could you please elaborate on what "survival contingency feature" you mean? We might be able to suggest alternatives.

and that reasonable plan expenses can be paid by the PSP.

But a PSP has more expenses than an IRA does (recordkeeping, reporting, etc). Investment firms generally waive IRA annual account fees with a balance greater than $25K to $50K. Unless the PSP has unusual assets w/ unusual fees, then most of the fees would go away w/ the PSP.

[mbozek]

I would very much appreciate if someone knowledgeable about qualified retirement plans could please comment whether an owner-employee Profit Sharing Plan (PSP) with 4 Trustees can be continued after the Employer retires without incurring IRS disqualiification. In an effort to be helpful, specific information follows re this Employer and the PSP.

The Employer is a sole proprietor and is the only PSP participant and plan beneficiary (i.e., no other employees). To provide continuity and permanence of administration, the PSP has 4 Trustees who are individually fully empowered to act on the plan and who can continue to maintain the the PSP and Trust after the Employer’s retirement and who can terminate the PSP if the Employer dies and can distribute any PSP assets to the Employer’s designated beneficiary(ies).

The Employer has had a PSP since 1963. His current plan is a self-trusteed Vanguard prototype PSP, maintained since 1992 (including GUST amendment in 2002) with annual filings of the 5500-EZ except in 2007 and 2008 since the PSP assets were less than $250,000. He has taken annual Required Minimum Distributions since age 70-1/2 and is now retired.

In the 2009 Vanguard Plan Adoption Agreement (to amend the plan for EGTRRA), the box was checked for a “Frozen Plan” after which is printed: “The Employer has discontinued all further contributions to the Plan. The Employer and the Trustee will, however, continue to maintain the Plan and Trust in accordance with the requirements of the Internal Revenue Code.” As part of continuing plan maintenance, the Employer is about to submit the Vanguard PSP amendment for the Pension Protection Act of 2006 and the Heroes Earnings and Assistance Relief Tax Act.

Recently, he was told by a compliance officer at Vanguard that (1) the IRS considers any plan without an Employer currently operating a business to be an “orphan plan” and that a plan needs to have “continuity and permanency” (which I would think may be met by having several plan Trustees) and (2) that the IRS has often ruled that a PSP whose contributions are frozen is effectively disqualified since there are no longer “substantial and continuing contributions” (and yet Vanguard offers a choice of “frozen plan” or of discretionry contributions in its PSP adoption agreement).

This Employer would like to keep a PSP for several reasons, including that his beneficiaries can choose to take their distributions as either a TIRA or RIRA, that he can include a survival contingency feature not available on an IRA, and that reasonable plan expenses can be paid by the PSP.

Thank you for your comments re if this owner-employee can continue using a PSP after retirement without disqualification risk If so, he would adopt a master and prototype plan or volume submitter plan with the curent 4 Trustees since Vanguard is discontinuing its PSP.

Tell the employer to unretire and find a way to make some money each year to continue contibutions to the plan even if a nominal amount, say $10 per year. Why deal with stupid companies such as vanguard when there are other prototype providers who will not be so rigid in their interpretation of the IRS rules for a client who has a substantial account balance? Any other advice is a waste of time. The other other option is to terminate the plan and rollover the distribution to an IRA and be done with this nonsense.

[Guest fairira]

Right, "TIRA and RIRA" were used in place of "Traditional IRA and Roth IRA."

[Guest fairira]

To masteff:

The survival contingency feature provides that his primary beneficiary wife must survive him by 150 days (or more) to receive the PSP assets, which she could directly roll over into her own traditional or Roth IRA (TIRA or RIRA). Otherwise, the PSP assets will be inherited by their 3 sons, the secondary/contingent beneficiaries, who could roll their shares of the PSP assets into inherited TIRA's or RIRA's.

Since the PSP is a self-trusteed plan, there are recordkeeping, reporting and advisory expenses which, while not major, can be paid by the PSP.

[Guest fairira]

To mbozek:

I appreciate your comments that the 2 main options are (1) that the employer unretire and find a way to make some money each year to continue contributions or (2) to terminate the plan and roll over the distribution to an IRA and "be done with this nonsense."

I posted my inquiry in an effort to clarify whether or not the PSP could be continued after the employer's retirement without the risk of IRS disqualification and several replies indicate the answer is "no."

To XTitan, jpod and PensionPro and any other responders:

Thank you very much for your helpful posts.

[K2retire]

Why deal with stupid companies such as vanguard when there are other prototype providers who will not be so rigid in their interpretation of the IRS rules for a client who has a substantial account balance?

Vanguard is not flexible, and their people have given me absolutely incorrect answers. They did not notify me when I needed to begin preparing a 5500 EZ or provide any assistance with it. They told me at the time of the GUST restatement that it was not legal to restate a MPPP into a PSP. With the EGTRRA restatement, they are discontinuing their MPPP and not allowing rollover of MPP funds into their PSPs.

But they do not charge for the document, and their funds are very good.

[Bird]

If the sponsor was a sole proprietor, then I'm not sure I'd worry about the sponsor "going out of business." I think the sole proprietorship continues to exist, even if it conducts no active business.

I find it really, really, really weird that there are 4 trustees for a one-man plan. I think that does nothing in terms of continuity and permancy.

I agree with the others that this is a lot of trouble for whatever perceived benefits are being gained. I'd find a way to achieve the "survival contingency feature" (which is a new one on me) some other way.

[david rigby]

The survival contingency feature provides that his primary beneficiary wife must survive him by 150 days (or more) to receive the PSP assets, which she could directly roll over into her own traditional or Roth IRA (TIRA or RIRA). Otherwise, the PSP assets will be inherited by their 3 sons, the secondary/contingent beneficiaries, who could roll their shares of the PSP assets into inherited TIRA's or RIRA's.

Is this legit in a qualified plan?

[masteff]

The survival contingency feature provides that his primary beneficiary wife must survive him by 150 days (or more) to receive the PSP assets, which she could directly roll over into her own traditional or Roth IRA (TIRA or RIRA). Otherwise, the PSP assets will be inherited by their 3 sons, the secondary/contingent beneficiaries, who could roll their shares of the PSP assets into inherited TIRA's or RIRA's.

Is this legit in a qualified plan?

Good question... you made me look!

Reg § 1-409(a)(9)-4 Reg § 1-401(a)(9)-4

From Q&A-1: "A beneficiary designated as such under the plan is an individual who is entitled to a portion of an employees benefit, contingent on the employees death or another specified event." (emphasis added)

From Q&A-4: "the employee's designated beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of September 30 of the calendar year following the calendar year of the employees death."

Sounds okay to me, at least based on the MRD regs.

If the sponsor was a sole proprietor, then I'm not sure I'd worry about the sponsor "going out of business." I think the sole proprietorship continues to exist, even if it conducts no active business.

I concur w/ Bird. IMO, this is in closer agreement w/ discussion of orphaned plans on the IRS website and in EPCRS. But I'd double check how the plan sponsor is specfically defined in the plan text.

I bet any number of other investment firms would love to have this plan since Vanguard doesn't seem to want to keep your client as a customer.

[david rigby]

Reg § 1-409(a)(9)-4

Just for clarity: typo. The reg. cite should be 1.401(a)(9)-4

[Guest fairira]

With the EGTRRA restatement, they are discontinuing their MPPP and not allowing rollover of MPP funds into their PSPs.

Vanguard is also doing away with their PSP's except for the option of an individual 401(k)

[Guest fairira]

If the sponsor was a sole proprietor, then I'm not sure I'd worry about the sponsor "going out of business." I think the sole proprietorship continues to exist, even if it conducts no active business.

I find it really, really, really weird that there are 4 trustees for a one-man plan. I think that does nothing in terms of continuity and permancy.

The sponsor was a sole proprietor but is now retired and so will not be filing a Schedule C.

The reason for the 4 trustees: one is the Employer, one is his wife, the others are their 2 sons. Thus, in case the wife dies and then the Employer dies, there will still be 2 living Trustees either of whom could complete the distribution of PSP assets and terminate it with a final 5500-EZ. So there would be continuity after the Employer's death though "permanency" would not be literally true. For that matter, what is permanent other than death and taxes?

[Guest fairira]

The survival contingency feature provides that his primary beneficiary wife must survive him by 150 days (or more) to receive the PSP assets, which she could directly roll over into her own traditional or Roth IRA (TIRA or RIRA). Otherwise, the PSP assets will be inherited by their 3 sons, the secondary/contingent beneficiaries, who could roll their shares of the PSP assets into inherited TIRA's or RIRA's.

Is this legit in a qualified plan?

Good question... you made me look!

Reg § 1-409(a)(9)-4 Reg § 1-401(a)(9)-4

If the sponsor was a sole proprietor, then I'm not sure I'd worry about the sponsor "going out of business." I think the sole proprietorship continues to exist, even if it conducts no active business.

I concur w/ Bird. IMO, this is in closer agreement w/ discussion of orphaned plans on the IRS website and in EPCRS. But I'd double check how the plan sponsor is specfically defined in the plan text.

Thank you, david rigby, Bird and masteff, for your comments and the reference to Reg § 1-401(a)(9)-4.

I'd appreciate any information or references that support that after the Employer's retirement the sole proprietorship continues to exist, even if it conducts no active business.

In Vanguard's Prototype Defined Contribution Plan (printed Mar. 2009), the [Plan] "'Sponsor' means Vanguard Fiduciary Trust Company ..." and the "'Employer' means the corporation, partnership, sole proprietorship or other employer that has adopted the Plan by executing the Adoption Agreement." The latter asks for the name of the Employer, EIN, type of organization (= sole proprietorship), address, etc.

Since Vanguard is closing its PSP, the Employer would adopt a prototype PSP--e.g., perhaps one from McKay Hochman but I don't know how the Plan Sponsor is specifically defined. I doubt that any definition deals with whether the Employer is active or retired.

From the EPCRS site: the term “Orphan Plan” means any qualified plan with respect to which an “Eligible Party” has determined that the plan sponsor (a) No longer exists; (b) Cannot be located; © Is unable to maintain the plan; or (d) Has abandoned the plan pursuant to regulations issued by the DOL. To me none of these “Orphan Plan” criteria seem to apply but I'd appreciate knowing if I'm missing something.

I may write the TE/GE Division of the IRS to see if I can get their view of whether the PSP can be continued after the retirement of the Employer (hopefully not risky since I won't use the Employer EIN or SSN).

[Bird]

The sponsor was a sole proprietor but is now retired and so will not be filing a Schedule C.

That was understood, but because it is a sole proprietor, and not another, more formal type of business, I think the sole proprietorship exists as long as the individual is alive, even if he is not actively running a business.

I may write the TE/GE Division of the IRS to see if I can get their view of whether the PSP can be continued after the retirement of the Employer (hopefully not risky since I won't use the Employer EIN or SSN).

Now you're confusing me. What entity would adopt the document? I think most people here would use the term "sponsor" to mean the employer adopting the plan, even though Vanguard or someone else might "sponsor" a prototype...but that's just semantics; the bottom line is that you need an employer to adopt the plan, and I'm not sure who you're suggesting would adopt it. As noted, I do think it is ok for the adopting employer to be an inactive sole prop.

[Bill Presson]

The sponsor was a sole proprietor but is now retired and so will not be filing a Schedule C.

That was understood, but because it is a sole proprietor, and not another, more formal type of business, I think the sole proprietorship exists as long as the individual is alive, even if he is not actively running a business.

I may write the TE/GE Division of the IRS to see if I can get their view of whether the PSP can be continued after the retirement of the Employer (hopefully not risky since I won't use the Employer EIN or SSN).

Now you're confusing me. What entity would adopt the document? I think most people here would use the term "sponsor" to mean the employer adopting the plan, even though Vanguard or someone else might "sponsor" a prototype...but that's just semantics; the bottom line is that you need an employer to adopt the plan, and I'm not sure who you're suggesting would adopt it. As noted, I do think it is ok for the adopting employer to be an inactive sole prop.

Bird, I think he means "hopefully not risky" because he won't divulge to the IRS the EIN or SSN when he calls to ask their opinion.

[Guest Sieve]

I wholeheartedly agree with Bird. This is not an artificial entity, such as a corp., which is created out of whole cloth, which can be dissolved so that it no longer is in existence, and which, when dissolved, cannot undertake any business transactions since it no longer exists. Here we have an individual, who, while alive, is always capable of transacting business and, whether or not the individual has decided not to work any longer, the individual remains, and can continue to maintain a retirement plan.

I undertstand how a human being can become an orphan, but not how a plan maintained by a sole proprietor can ever become an orphan plan.

[J Simmons]

I undertstand how a human being can become an orphan, but not how a plan maintained by a sole proprietor can ever become an orphan plan.

The plan would become an orphan when the sole proprietor dies without having named a successor. In dealing with a situation such as this, an IRS agent told me that it is always better to have a contingent successor named for a sole proprietor in the event of death rather than try to 'bank on' the IRS recognizing the probate estate of the sole proprietor as a successor with authority to wrap up the plan. However, in two situations where I have had only a probate estate to lay claim to successor sponsorship, I have not had the IRS give me any pushback.

[Guest Sieve]

Of course--an orphan plan upon death without a named successor. Looks like an exception to "ever" to me . . .!!

[J Simmons]

Currently, I'm handling a situation where a sole prop had retired and then a few years later died, without having first term'd the plan. Due to some document failures in its history, we filed for both f5310 determination and VCP to correct interim amendment failures and failure to hold plan assets in trust (some were in IRAs). The sole prop had named his son as a successor sponsoring employer in the event of the sole prop's death. While paying attention that every other i is dotted and t crossed, the Service has not made any issue with the fact that the plan was continued after the sole prop closed his business or that his son is successor sponsor.

[Earl]

Care should be taken in listening to Vanguard about compliance. Their recent letter to clients announcing discontinuing of fbo accounts said client had options such as rolling to an IRA - which my client did (without talking to me first).

Now he as made in-service distributions (no provision in plan), distributed 401k money (everyone is under 59 1/2 and no provision even for age 59 1/2) and he wants to continue his 401k plan without interruption at Schwab.

Thanks for your help there, Vanguard.

[J Simmons]

Care should be taken in listening to Vanguard about compliance. Their recent letter to clients announcing discontinuing of fbo accounts said client had options such as rolling to an IRA - which my client did (without talking to me first).

Now he as made in-service distributions (no provision in plan), distributed 401k money (everyone is under 59 1/2 and no provision even for age 59 1/2) and he wants to continue his 401k plan without interruption at Schwab.

Thanks for your help there, Vanguard.

As the old saying goes, he got what he paid for. Vanguard did not charge for that bit of advice, and it was worth every dime he paid for it. Too bad he didn't talk to you, Earl, before taking that IRA rollover step.

[Guest fairira]

Wow, I am impressed by the quality and volume of posts replying to my posts. Thank you, everyone, for your comments. Rather than clogging up this thread with a batch of separate replies by me with quotes from your posts, I'll try to reply to most of you in this one post.

To Bird (Oct. 31, 4:55 AM): I noted your view that the sole proprietorship exists as long as the individual is alive. Sorry that my wording was confusing. My reference to no Employer EIN or SSN was intended to refer to my letter to the TE/GE Division of the IRS not being risky, and not to refer to the PSP document which would likely use both the EIN and SSN. My thought was that with IRS blessing, the Employer/sole proprietor would feel free to continue his existing Vanguard PSP or, more likely, to adopt a different prototype or volume submitter plan.

To Bill Presson (Oct. 31, 10:23 AM): You correctly understood what I intended to say.

To Sieve (Oct. 31, 10:29 AM): Thank you for your view and your reasoning that the sole proprietorship continues as long as the individual is alive.

To J Simmons (Oct. 31, 11:22 AM and 11:56 AM): Since the PSP would have 4 trustees, each fully empowered to act on the plan, there will be someone who can distribute any PSP assets to the Employer’s designated beneficiary(ies) and terminate the PSP after the employer's death. So while it would be an "orphan plan" on the employer's death, I should think the existence of other trustees would suffice to satisfy the IRS, particularly since you said "... the Service has not made any issue with the fact that the plan was continued after the sole prop closed his business ..." Re this employer naming a successor sponsoring employer, this seems problematic for him since he is a physician but none of his children are. Also, on his death the PSP should not involve probate estate since he has designated beneficiaries in his PSP.