Terminates 401(k), starts a new PS plan

[John Feldt ERPA CPC QPA]

A client terminated and paid out all participants from their 401(k) plan in mid-December 2008.

They now want to start up a PS only plan (no deferrals) with a January 1, 2009 effective date.

For vesting purposes in the PS plan, they want to exclude years before this new plan is established.

I think there are some problems with this, but haven't found the guidance. I don’t think a new PS plan with a January 1, 2009 effective date can exclude years before the plan starts if just a few days earlier in December 2008 the company had terminated another qualified plan. I also have this feeling that there's something else causing a problem here, but it eludes me (other than December 28 being an eleventh-hour time to finally decide to set up a plan for the year).

Thoughts?

[rcline46]

Successor plan rules for vesting, but disqualification of BOTH plans under the 401(k) (6)? rules - needs to be at least 12 months after distribution before a new plan is set up.

[John Feldt ERPA CPC QPA]

Yep, that was it.

In the 1.401-1(d)(4), where it says "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..."

If a new plan is executed now (the execution date would be 12 months after the amounts were paid out of the prior plan), can it have it's effective date be retroactive, or does that make this new plan "exist" retroactively too, for purposes of the application of this regulation?

[rcline46]

oooohhhh, good question! So if the new PSP were signed on 12/31/09, with contributions based on a full limitation year.......

If worded correctly so the effective date were 12/31/09 and signed 12/31/09, with contributions based on calendar year pay (not plan year pay), and a limitation year of 1/1-12/31, and have a short year, but set so no proration of pay - that just might work. I wouldn't do it, but it might get past inspection if ever audited.