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Terminating profit sharing plan wants to force rollovers to co's 401k plan.


katieinny

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I saw no problem in telling the employer that they could force direct rollovers for their active employees from the terminating profit sharing plan to the company's 401(k) plan, until I realized that the PS plan has several distribution options, including annuities. Now I'm not so sure. Are they safe to force the rollover if the 401(k) plan offers the same annuity options? If the 401(k) doesn't have the same annuity options, I would assume that they can only offer the direct rollover as an option, but not force it.

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I saw no problem in telling the employer that they could force direct rollovers for their active employees from the terminating profit sharing plan to the company's 401(k) plan, until I realized that the PS plan has several distribution options, including annuities.

In a plan termination, the participant is in control of where the distribution goes. No, you cannot force a participant to make a direct rollover to another ER plan.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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If you had merged the two plans into one, then all PS assets would automatically go to the 401(k) plan - akin to "forcing" a rollover, but not correct terminology. And you'd have to keep the annuity options on that money.

But if the plan terminated as you say, then you can't force them to roll it over regardless of what the distribution options are.

Ed Snyder

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Yeah, I suspect you're right, although I know that other ERs have forced the rollover when there's been another plan to roll the money to. But, of course, that doesn't make it right.

One must be careful in the words they choose. I've worked with ERs who have said a plan is "terminating" and assets would move to a different plan when in fact it was a merger of one plan into the other. In a "technical" sense, one plan ceases to exist (independently) and many say it has "terminated."

This thread points out the value of PLANNING and involving trusted advisors in doing so, to achieve the desired result.

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I decided to check my ERISA Outline Book -- Plan Distributions chapter, Special rules for plan termination. The implication there is that plans with annuity options, or where the employer maintains another DC plan (this plan comes under both) doesn't have the same options as a plan with no annuity option. As you have already suggested -- assets that are TRANSFERRED must have the same optional forms of benefits. In any case, the ER has elected to terminate the plan, not merge it with other plan, so no forced rollover.

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  • 1 month later...

Have a similar situation. Employer is terminating frozen money purchase plan and a handful of participants with balances over $5,000 have failed to return election forms. The employer also has an ongoing 401(k) plan. The money purchase plan contains the following language:

Plan Termination. In the event of the termination or partial termination of the Plan by the Employer, the Account balance of each affected

Participant will be nonforfeitable. Notwithstanding the consent provisions of Section 10.6©, upon Plan termination, if the Plan does not

offer an annuity option (purchased from a commercial provider) and the Employer or any entity within the same controlled group as the

Employer does not maintain other defined contribution plans (other than an employee stock ownership plan as defined in Code section

4975(e)(7)), the Participant’s Account balance will, without the Participant’s consent, be distributed to the Participant. However, if any entity

within the same controlled group as the Employer maintains another defined contribution plan (other than an employee stock ownership

plan as defined in Code section 4975(e)(7)), then the Participant’s Account balance will be transferred, without his or her consent, to the

other plan if the Participant does not consent to an immediate distribution.

Obviously we would have to preserve the joint and survivor and annuity options on this transfer. Any thoughts? It seems like it's not just an option, but actually mandated.

Dog

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  • 3 weeks later...
  • 2 years later...

Related to this thread, but different circumstances:

Company has 2 DC plans - 401K in one and other DC money with annuity requirement. Company would like to terminate the second plan and retain only the 401K plan and have everybody take their money out of the 2nd plan period. Not interested in rollovers. Is there any reason they can't do that while there is an existing ongoing plan?

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Back to the originating query, if the employer will amend the plan to discontinue contribution accruals and provide a final distribution, could the employer also provide that for any eligible rollover distribution for which the distributee doesn't specify what he or she wants the default distribution is not a payment of money but rather a direct rollover to the employer's other plan?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thank you for the pointer.

It leads to another question: If a participant does not consent to the terminated plan's distribution and the employer's other plan by its terms precludes a transfer-in (a common provision in my experience), how does the administrator of the terminated plan complete the termination?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Plan amendment. The plan sponsor controls the terms of the plan. I have no sympathy for buyers of inferior products. There is a more sinister approach. If only a few rugged individuals refuse to direct a distribution, they might want to know that they will be bearing the full administrative cost to the extent permitted by law. They might be less intransigent after seeing some relatively hefty expense charges.

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