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Plan Termination and Last Day Rule


Rai401k

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Company is an LLC - all employees are being laid off prior to the end of the plan year but LLC will remain open with partners until 12.31. This will cause a partial plan termination and all current employees will become 100% vested.

Current plan is a Discretionary New Comp Profit Sharing and Plan is Top Heavy. Allocation requirements for New Comp profit sharing are 1000 hours and last day.

If the plan is not officially being terminated until 12.31 does the top heavy contribution need to be given to the employees since they terminated prior to 12.31?

What if they decide to terminate prior to 12.31 (Let say 9/30) but all employees are already gone - does the plan termination date become the last day of the plan year?

We already know it will cause problems with testing, but what about the NC Contribution? If all the employees are gone prior to the last day of the plan year are they required to get a NC contribution.

Partners are trying to maximize themselves before they close the doors but don't want to provide a contribution to the employees that will be leaving!!!

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At the 2010 ASPPA Annual Conference the following was asked (#3 on the Q and A sheet)

DC plan is top heavy and has a plan year ending 12/31. The plan terminates

on September 15, 2010. Normally, TH minimums are provided only if the

employee is employed on the last day of the plan year. (Assume that there

are salary deferrals during the year so that, if a top heavy minimum is

required, it needs to be made.)

Questions:

(1) For the 2010 plan year, is 9/15/2010 treated as if it were the last day of

the plan year, so that only non-key employees who are employed on that

date are entitled to a TH minimum?

(2) If (1) is Yes, is the 3% minimum calculated for compensation from

1/1/2010-9/15/2010?

(3) If (1) is No, is there NO top heavy minimum for the 2010 plan year

because the plan terminates before the end of the year (similar to the

concept that there is no money purchase plan funding if the plan terminates

before the end of the year and there is a last day employment requirement),

or does the plan have to wait to see who is employed on 12/31/2010 to

determine who is entitled to the TH minimum, even though the plan has

terminated before that date?

(4) Is the answer to any of the above affected by whether the employer

continues in existence through the end of 2010?

(1) Of course, if there is no employer contribution, there would not be an obligation to provide top

heavy minimum contribution. But, if there were contributions to keys during the year, including

elective deferrals, there is a top heavy minimum based on compensation and employment

through 9/15/10. Plan must liquidate within a reasonable time under Rev. Rul. 89-87 or else

9/15 date may not be reasonable. There is effectively a short plan year for top heavy purposes.

(2) yes

(3) n/a

(4) no change

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At the 2010 ASPPA Annual Conference the following was asked (#3 on the Q and A sheet)

DC plan is top heavy and has a plan year ending 12/31. The plan terminates

on September 15, 2010. Normally, TH minimums are provided only if the

employee is employed on the last day of the plan year. (Assume that there

are salary deferrals during the year so that, if a top heavy minimum is

required, it needs to be made.)

Questions:

(1) For the 2010 plan year, is 9/15/2010 treated as if it were the last day of

the plan year, so that only non-key employees who are employed on that

date are entitled to a TH minimum?

(2) If (1) is Yes, is the 3% minimum calculated for compensation from

1/1/2010-9/15/2010?

(3) If (1) is No, is there NO top heavy minimum for the 2010 plan year

because the plan terminates before the end of the year (similar to the

concept that there is no money purchase plan funding if the plan terminates

before the end of the year and there is a last day employment requirement),

or does the plan have to wait to see who is employed on 12/31/2010 to

determine who is entitled to the TH minimum, even though the plan has

terminated before that date?

(4) Is the answer to any of the above affected by whether the employer

continues in existence through the end of 2010?

(1) Of course, if there is no employer contribution, there would not be an obligation to provide top

heavy minimum contribution. But, if there were contributions to keys during the year, including

elective deferrals, there is a top heavy minimum based on compensation and employment

through 9/15/10. Plan must liquidate within a reasonable time under Rev. Rul. 89-87 or else

9/15 date may not be reasonable. There is effectively a short plan year for top heavy purposes.

(2) yes

(3) n/a

(4) no change

Thanks Tom, That is very helpful!

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