Freezing 0% Money Purchase Plan

[PensionPro]

We have a 0% MPP where the 2 owners were the only eligible employees and filing 5500-EZ. Few employees would become eligible in 2016. Can the plan be amended to only cover the 2 owners and exclude everyone else. I don't think it is a cutback and I don't think there is a coverage issue but I am looking for others' opinion. Also must such an amendment be prospective or can it be retroactive? Thanks!

[Lou S.]

Why do they still have the plan?

Why not terminate it or merge it with their PS/401(k)? Assuming they have another DC plan.

Amendment would have to be prospective.

[ETA Consulting LLC]

Well, when you look at what it means to benefit from the plan, it is actually accruing a contribution. So, until an HCE actually receives (or accrues) a contribution, non-discrimination would not fail. Hence, you could easily amend the plan to exclude any employees other than the owners (in that regard).

I, personally, do not see (off hand) any other benefits, rights, and features issues that would come into play in this scenario; as no one else would have a balance.

Good Luck!

[ESOP Guy]

Why can't you allow the employees into the plan? I mean they will accrue a benefit of 0% of compensation every year.

I tend to be more troubled by the idea of a 0% MP plan. I know several ERISA attorneys who took the position you can't do that and so when the companies I knew wanted to keep the plan for various reasons but stop accruing meaningful benefits the plan was amended so the benefit rate was 0.5% of pay.

[Doghouse]

A year or so ago, one of my clients had an IRS audit of their 0% money purchase plan. This plan was created primarily as a rollover vehicle for illiquid assets from a terminated profit sharing plan. All but the owner was excluded from participation, primarily so that the plan could file a 5500-EZ and also avoid the Summary Annual Report requirement.

The problem was in the rollover provision. Even though the plan had provision for rollovers to be made by any employee, whether otherwise eligible for the plan or not, the ability to roll into the plan wasn't really presented to staff, because it wasn't seen as a desirable option for them. The IRS took the position that this was a benefits, rights and features problem. We appealed the finding on the taxpayer's behalf. Unfortunately, I left the firm at that point, so I'm not sure how or if it was resolved.

The point being... you sometimes have to watch out for potential problems on what would seem to be a no-brainer.

[PensionPro]

The reason they have the plan is the owners wanted to rollover illiquid assets from another plan and file 5500-EZ and not have to provide SARs etc. Good point on the rollover issue and to watch out for the minor issues.

[PensionPro]

If other employees become eligible and the plan can no longer file 5500-EZ, would the plan have to get fidelity bond coverage on non-qualifying assets or would they be exempt by virtue of the assets only being allocated to the owners' accounts? Thank you!

[Doghouse]

OK, I don't want to seem like all of my plans are audited, but I had another one some years ago where there was a frozen profit sharing plan in which only the owner had an account balance. For reasons that pre-dated my involvement, it had like $30 million in it. Of course his prior TPA had him filing an EZ. We filed a regular 5500SF for him which triggered all kinds of problems, including the fact that it was impossible to obtain a fidelity bond covering $30 million of non-qualifying assets. The fact that no employees had a balance in the plan was immaterial in EBSA's analysis.

OK, what else you got? I am sure I had an audit addressing it.

[PensionPro]

Thanks Doghouse, very pertinent info, so glad you have an app or an audit for that!