Profit Sharing Plan termination

[cpc0506]

Client has a straight Profit sharing plan. Client is a doctor's office that is joining with 5 other doctors offices in 2014. Client intends to terminate the plan as of 12/31/2013 but would like to make a profit sharing contribution for 2013. Does client have until the normal deadline of 3/15/14 to make the contribution?

[ETA Consulting LLC]

Yes. The client would also have 12 months after the termination date to distribute all assets. Termination, being a distributable event, "may" result in participants having to receive 2 distributions in order to be fully paid out of the plan. So, legally, your answer is yes. Administratively, you may have some coordination to do.

Good Luck!

[Lou S.]

Sure, no problem.

[cpc0506]

Client was informed by an attorney representing him that the contribution must be made before the plan is terminated. I cannot understand why. Does anyone have any thoughts on this?

[Belgarath]

Possibly attorney meant that all assets must be distributed prior to the plan being "terminated" - and you can't distribute the assets until they are contributed, rather than that all contributions must be made by the "termination date" of 12/31.

Did the attorney actually say that all contributions must be made by 12/31?

[cpc0506]

Here is the language he used: "Termination of the plan needs to occur prior to 12/31/13. In some of the plans maintained by the Practices, there are employer contributions earned by participants during the plan year that have not yet been deposited into participants' accounts. This would include safe harbor contributions, profit shairng contributions, etc. that typically are deposited before the due date of the Practice's tax return. These contributions need to be made before the existing plans are terminated."

Not sure why he is saying prior to 12/31/13. The intent of the client is to terminate the plan as of 12/31/13 with an adopting resolution dated prior to 12/31/13.

[KJohnson]

I can see it being more of an issue with a 401(k) plan. You can't distribute if there is a successor plan. If someone could argue that it is the new entity making the contribution to the plan it could be considered maintaining the plan and if the new entity also had a 401(k) of its own you arguably run afoul of the successor rule (or more precisely the alternative defined contribution plan rule). Or if the new entity could be considered in an ASG with any of the old entities that continued to exist you could have the same issue.

Sal goes into this a good bit in his book and says that in an asset deal the best case is to terminate and distribute before the "deal". But again, he is speaking to 401(k) plans.

If this is some kind of stock deal where the entities are being statutorily merged then there are even further complications if the plan is "maintained" after the merger date.

[cpc0506]

There is no intention to maintain the plan after 12/31/13. The new practice does not want the profit sharing plan of the client. The client intends to terminate the plan effective 12/31/13 but wants to make a 2013 contribuiton, which the client would make by 3/15/14. At which point, all funds will be distributed to the participants.

[KJohnson]

Understood. If you have the ERISA Outline book. look at 6.277-6.280. Again, I think this is more of a 401(k) issue rather than an issue of an employer with just a profit sharing plan. Also a good bit depends on how the "deal" is structured.

If Doc is just shutting doors and joining a new practice with no stock or asset sale involved and if Doc not continue the old practice as a business that could be in an ASG with the new practice then everything might be simpler.

I would just ask the attorney why he or she is taking that position.

[austin3515]

I think the attorney should have been more clear. Allow me to elaborate:

"Termination of the plan needs to occur prior to 12/31/13"

It is true that the Plan should be terminated as of 12/31/2013, and that this resolution should be executed prior to 12/31/13. This means a resolution needs to be signed terminating the plan, indicating that after 12/31/13, no further benefits shall accrue.

"These contributions need to be made before the existing plans are terminated."

In my opinion, what he is referring to, is simply the fact that the Plan will not be fully terminated (as separately defined for 5500 reporting purposes, when all plan assets are distributed) until all of the contributions have been funded and subsequently distributed.

I would go back to the attorney and ask if this is what they meant. Perhaps he/she was just rushing and not carefully considering the practical implications of their words (a sin which many "so called" ERISA attorneys are guilty of - not the real ERISA Attorneys, of which many contribute on these boards - only the "so called" ones.

[mbozek]

I think the attorney should have been more clear. Allow me to elaborate:

"Termination of the plan needs to occur prior to 12/31/13"

It is true that the Plan should be terminated as of 12/31/2013, and that this resolution should be executed prior to 12/31/13. This means a resolution needs to be signed terminating the plan, indicating that after 12/31/13, no further benefits shall accrue.

"These contributions need to be made before the existing plans are terminated."

In my opinion, what he is referring to, is simply the fact that the Plan will not be fully terminated (as separately defined for 5500 reporting purposes, when all plan assets are distributed) until all of the contributions have been funded and subsequently distributed.

I would go back to the attorney and ask if this is what they meant. Perhaps he/she was just rushing and not carefully considering the practical implications of their words (a sin which many "so called" ERISA attorneys are guilty of - not the real ERISA Attorneys, of which many contribute on these boards - only the "so called" ones.

One Question that needs to be asked is whether the lawyer wants the doc to make the contribution by 12/31/13 because the Doc is terminating his business, e.g., a PC, on Dec 31, 2013, before he joins the new practice so the plan sponsor would not be able to make a contribution on 3/15/14 because it is no longer an operating entity.