Business continues but in a new form

[Oh so SIMPLE]

A partnership of 6 dentists is going to end, as one of them is now retiring. A new LLC will be formed by the remaining 5 to continue the dental practice. The old partnership will continue to exist only to collect accounts receivable. All dentists and staff will go to work for the new LLC on July 1.

The old partnership had a profit sharing plan (no 401k feature). The new LLC will set up a new 401k plan.

Question 1: would all those with benefits in the old profit sharing plan have a severance from employment for purposes of Code section 402(e)(4)(A)(iii) since they no longer work for old partnership? Any citations would be useful.

Question 2: if no 'severance from employment', could the old profit sharing plan be terminated in order that all of the benefits under that plan could, at the individuals' options, be rolled into IRAs? Again, any citations would be helpful.

[Oh so SIMPLE]

bump

[rcline46]

Just have the new org adopt the old plan, then no payouts, life goes on a normal. Just make sure the 5500 is filled out correctly.

[Oh so SIMPLE]

Just have the new org adopt the old plan, then no payouts, life goes on a normal. Just make sure the 5500 is filled out correctly.

Are you saying the partners and employees would not have a severance from employment that under the plan documents entitles each to distribution if he wants it?

If not a severance from employment, and they want to be able to choose individually at this time what to do with their benefits, can they terminate and create a distributable event? Would the new plan being set up prevent the old plan's termination from being a distributable event?

[Guest Sieve]

There is no IRC Section 402(e)(4)(A)(iii) as you cite. What is the IRC Section you are referring to?

If you want to be able to distribute, and do not want to change name of plan and continue it, then I would terminate to be certain that distributions are permitted.

[rcline46]

I would be careful of successor organization/ successor plan rules here, check them carefully. I know the unworkable successor controlled group rules under 414(o) (?) were withdrawn a long time ago, but is there really a separation from service?

[Guest Sieve]

That's why I'd suggest a conservative approach, if distributions are desired, of terminating the plan (since there were no 401(k) deferrals in that plan).

[Oh so SIMPLE]

There is no IRC Section 402(e)(4)(A)(iii) as you cite. What is the IRC Section you are referring to?

It turns out to be an obsolete reference to part of the definition of eligible rollover distribution.

[Oh so SIMPLE]

That's why I'd suggest a conservative approach, if distributions are desired, of terminating the plan (since there were no 401(k) deferrals in that plan).

Sieve, do you think there is any concern as rcline46 pointed out (successor organization/ successor plan rules) that would make it a problem to terminate the old profit sharing plan in order to make everyone with benefits in it entitled to a distribution, but then start the new 401k plan right after that?

[Oh so SIMPLE]

That's why I'd suggest a conservative approach, if distributions are desired, of terminating the plan (since there were no 401(k) deferrals in that plan).

Sieve, do you think there is any concern as rcline46 pointed out (successor organization/ successor plan rules) that would make it a problem to terminate the old profit sharing plan in order to make everyone with benefits in it entitled to a distribution, but then start the new 401k plan right after that?

Bump for Sieve: do you agree with rcline46 about the successor organization/successor plan rules being problematic in making distributions by reason of 'terminating' the old profit sharing plan in light of the new entity beginning a new 401k plan so quickly?

[Guest Sieve]

Why does it matter? rcline's concern related to termination of employment, but my suggested approach would get around the termination of employment issue and would distribute based on termination of the plan. There was no 401(k) feature in the former plan, so there are no successor plan issues at termination of the PSP since no 401(k) deferrals will be distributed.

Now, if plan termination is not the desired result, then participant distributions may depend on plan language (termination of employment, severance from service, etc., etc.)

[Oh so SIMPLE]

Sieve, both plans would be profit sharing plans. I know the new one would have a 401k feature that the old one did not. Would this be 'manufacturing' a distributable event by terminating the old profit sharing plan and then the successor in interest, for all intents and purposes, starting a new profit sharing plan with a 401k feature? Could the IRS collapse the 'termination' of the old plan and starting of the new one in order to challenge the appropriateness of making a payout to employees that are continuing? Or now, after the same desk rule has been removed, can we merely hoist form over substance by terminating the old profit sharing plan?

[Guest Sieve]

If the PSP is more than a few years old, there is no reason you can't termiante one plan, & pay out, and then establish another plan. A PSP can pay at a stated age or occurrennce of an event, so paying as a result of any kind of plan termination is ok. If you feel uncomfortable with that, amend the PSP to permit distributions after age XX, and distribute based on that basis. I don't think you'd have any problem from the IRS with regard to the plan termination issues, as long as the plan has been in place long enough (probably 3 years).