Plan Terminations

[Guest lap716]

Hello,

I have a would be client who had a 401(k) plan he terminated effective 10/15/08, all the distributions were completed by 1/31/09 and the final 5500 was filed. The client is now having a better year and would like to start a new 401(k) plan. From what I understand, the business never closed, so he would like to have something in place for 2009. I thought there was a 1 year wait period or is this with a Simple plan? I haven't been able to find any guidance on a wait time between establishing 401(k) plans. Thanks for your help!

[John Feldt ERPA CPC QPA]

I think there would be no employee deferrals that can be offered until 12 months after the distributions were all completed. So I think you could have a nonelective only (profit sharing) until then.

[Tom Poje]

from the IRS website

http://www.irs.gov/retirement/sponsor/arti...=151926,00.html

we read:

Generally, distributions of elective deferrals cannot be made until one of the following occurs:

The participant dies, becomes disabled, or otherwise has a severance from employment.

The plan terminates and no successor defined contribution plan is established or maintained by the employer.

The participant reaches age 59½ or incurs a financial hardship.

..................

so the question becomes, what is the definition of successor plan, which is found in Notice 98-1 (unless there is another definition I don't know about) - see bold type in the enclosed. making you work for your thanksgiving supper.

[Guest lap716]

from the IRS website

http://www.irs.gov/retirement/sponsor/arti...=151926,00.html

we read:

Generally, distributions of elective deferrals cannot be made until one of the following occurs:

The participant dies, becomes disabled, or otherwise has a severance from employment.

The plan terminates and no successor defined contribution plan is established or maintained by the employer.

The participant reaches age 59½ or incurs a financial hardship.

..................

so the question becomes, what is the definition of successor plan, which is found in Notice 98-1 (unless there is another definition I don't know about) - see bold type in the enclosed. making you work for your thanksgiving supper.

Thank you! Since this would pertain to deferrals and I think it would be a sucessor plan, would it be possible to have a profit sharing only plan effective for 2009?

[Kevin C]

The term in the final regulations is "alternative defined contribution plan". A profit sharing plan would be an alternative defined contribution plan, so it can't be established until a full year after the final distribution of assets from the 401(k).

1.401(k)-1)(d)(4) Rules applicable to distributions upon plan termination

(i) No alternative defined contribution plan. --A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term "employer" contained in §1.401(k)-6 is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f).

(ii) Lump sum requirement for certain distributions. --A distribution may be made under paragraph (d)(1)(iii) of this section only if it is a lump sum distribution. The term lump sum distribution has the meaning provided in section 402(e)(4)(D) (without regard to section 402(e)(4)(D)(i)(I), (II), (III) and (IV)). In addition, a lump sum distribution includes a distribution of an annuity contract from a trust that is part of a plan described in section 401(a) and which is exempt from tax under section 501(a) or an annuity plan described in 403(a).

[Tom Poje]

ugh. make me look this stuff up. it sounds like SOL

1.401(k)-1(d)(4) Rules applicable to distributions upon plan termination

(i) No alternative defined contribution plan. --A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term "employer" contained in §1.401(k)-6 is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f).

[Belgarath]

Off topic here - Tom, what is the proper pronunciation of your last name? (So I can give proper credit when quoting one of your songs)

[Tom Poje]

having a bad hair day, so I needed a chuckle. thanks.

probably should be pronounced

PO- G (as in Gee whiz)

in grade school, when OJ Simpson was popular

they used to say O-J - Poe - Jay

the original Croation pronunciation is

Poi - Yah (the name actually means "song")

so take your pick. maybe someday I will post one of the many others. I think its somewhere between 12 and 15.

Happy Thanksgiving from a Tom!

[Belgarath]

Consider yourself fortunate. Seems like mine is mostly pronounced ****head. At least by my wife.

And a Happy Thanksgiving to you as well.

[Guest Sieve]

Bel -- I don't know how I missed this one when it was originally posted. Looks like you and I are long lost cousins--we have the same last name . . .!!!