mid year plan termination of SH plan

[Guest EPS2]

small SH plan using basic match formula calculated on an annual basis

calendar year plan

sponsor entity is professional corporation

sponsor wants to terminate plan due to retirement at the end of the plan year, but wants to have everyone paid out by 12/31/11 so that final 5500 can be filed for 2011. He wants to have plan termination effective 10/31/11 so that participants can begin their benefit payouts in time to have everyone paid by 12/31/11.

After reading 1.401(k)-3(e)(4) I am confused...

Here is what I understand needs to happen for the termination to be effective 10/31/11:

1) Notice must be given to all participants (all three of them) 30 days in advance of the amendment to terminate the plan and hence terminate the SH match contribution.

2) Plan amendment needed to require ADP/ACP testing using current year method

3) Top Heavy allocations must be provided for the termination year.

The amendment to terminate the plan on 10/31/11 does not result in a short plan year for 12/31/11...right? Or...does it? What compensation do we use for calculations??

Wouldn't it be so much easier to terminate the plan as of 12/31/11? No ADP/ACP...no Top Heavy allocations...just the notice letting the participants know that the plan is terminating effective 12/31/11, therefore no SH contributions for 2012.

Am I missing anything here?

Please advise...

Thanks

[K2retire]

Why are you amending to require testing on a SH plan?

[rcline46]

Its a bad result of IRS regulations. TO terminate a SH plan mid-year, you must give notice that the SH is being stopped. Stopping a SH causes ADP/ACP testing. Bummer. Also reinstates Top Heavy rules, double bummer.

FInal 415 regs requires a proration of comp limit (as does stopping sh) when a plan is terminated mid year. Also pro-rated 415 limits. Triple bummer.

[Guest EPS2]

Why are you amending to require testing on a SH plan?

In Sections 1.401(k)-3(e)(4) and 1.401(m)-3(f)(4) provide that, if a plan terminates during a plan year, the plan will not fail to satisfy the safe harbor reuirement that the plan be a full 12 months because the final plan year is less than 12 months, provided that the plan satisfies the ADP/ACP testing...

Isn't that right? This is the case only if the plan terminates mid-year (hence safe-harbor terminates mid year)...

If the plan terminates on the last day of the plan year, then all is good. The notice given to the participants at least 30 days before the plan year beginning 1/01/2012 would say that there would not be any SH contribution due to plan termination...the plan would be amended at least 30 days before the 2012 plan year taking the SH provision away, terminating the plan, and letting everyone know about their distribution options...

Am I understanding this correctly?

[K2retire]

I've helped numerous SH plans terminate mid-year and never heard this before. At one former employer, I'm sure there were hundreds of termination that were never tested.

[Guest EPS2]

I've helped numerous SH plans terminate mid-year and never heard this before. At one former employer, I'm sure there were hundreds of termination that were never tested.

Really? Testing AND Top Heavy issues... I guess it's good thing for you that it's a former employer...

We have decided to tell the client not to terminate his SH plan mid year. The only reason why he wanted to do it was so that he could pay everyone out right away and not have to file another 5500SF for 2012. It wasn't because he couldn't afford the SH contribution.

So, it will be a lot easier... no testing and no Top Heavy issues. Thank goodness!

[Guest Sieve]

There's an exception to the requirement that a mid-year SH plan termination is treated the same as a suspension of the SH provisions (thus requiring ADP/ACP testing for the entire year, etc.), and that's if the plan termination either (i) results from a Section 410(b)(6)© transaction, or (ii) results from a significant business hardship (Treas. Reg. Sections 1.401(k)-3(e)(4)(ii) and 1.401(m)-3(f)(4)(ii)).

It's highly unlikely, K2, but is it possible that all those terminations fall into either of those categories?

[Guest EPS2]

There's an exception to the requirement that a mid-year SH plan termination is treated the same as a suspension of the SH provisions (thus requiring ADP/ACP testing for the entire year, etc.), and that's if the plan termination either (i) results from a Section 410(b)(6)© transaction, or (ii) results from a significant business hardship (Treas. Reg. Sections 1.401(k)-3(e)(4)(ii) and 1.401(m)-3(f)(4)(ii)).

It's highly unlikely, K2, but is it possible that all those terminations fall into either of those categories?

Yep... Didn't that come about because the regs didn't address the mid-year plan term of SH that provided for the non-elective SH contribution?

[Guest Sieve]

Actually, this exception was in the 2004 final regs, long before the reg amendment permitting mid-year suspension of SH QNECs (although the NEC suspension reg did revise a cross reference in the plan-year termination reg).

Before the issuance of the SHNEC suspension reg, there were many who discussed the potential for stopping a SHNEC mid-year by terminating the plan under this plan-year provision. It was an extreme measure, perhaps, and raised its own issues if a subsequent 401(k) was established, but at least it accomplished the desired goal for employers who simply no longer could afford the QNEC.

[K2retire]

In Sections 1.401(k)-3(e)(4) and 1.401(m)-3(f)(4) provide that, if a plan terminates during a plan year, the plan will not fail to satisfy the safe harbor reuirement that the plan be a full 12 months because the final plan year is less than 12 months,

Curiously, this much of that reg. was regularly quoted in that office!

Larry, I suspect that some of those plans would meet the hardship rule, but no where near all of them. And since the question was never asked, there is no way to know. Ironically, the staff was regularly told to call clients who had inquired about plan terminations to remind them to get everyone paid out before the end of the year (requiring that the termination date be before 12-31) to avoid another year's annual administration fee and 5500 filing.