Terminating plan

[EBDI]

Client is a partnership (CPA firm) that is dissolving 12/1/15 and the business is being sold. Their plan is a 401k safe harbor non elective. Normally all 401k contributions have to be made before the plan terminates. Since I can't determine the partners self employed income until after 12/1/15, can they deposit their 401k and safe harbor contributions after the plan terminates? If another firm is buying their business, does the 401k plan need to be terminated before the sale date?

[Mike Preston]

... Normally all 401k contributions have to be made before the plan terminates.....

Where do people come up with these concepts? Its like swatting flies in the middle of a landfill.

[QDROphile]

Depends on what you mean by termination. If you mean liquidation, which terminates the plan for tax purposes, then contributions have to be made first.

[justanotheradmin]

I think you are confusing what I would call plan termination and plan closure.

I explain to clients that the Termination Date is the date that typically benefits stop accruing. Its not uncommon for me to see the final payroll, or safe harbor deposit go in after the termination date. Particularly the employer contributions, which may still need calculations and testing.

I use plan closure to explain that is what happens when all the balances are brought to zero. this would be after deposits are made, distributions are completed. I also find it helpful when explaining the Form 5500 requirements. Namely that it must continued to be filed until the plan balance is shown as zero.

I realize that plan closure is not a technical term and the above usage does not quite reflect the regs, but for the average client, it seems to help them make sense of it all.

[EBDI]

Thanks justanotheradmin. What threw me off was the plan amendment that stated the plan terminates 12/1/15 and no further employee deferrals can be made after that date. After reading your reply, I realize the deferrals withheld from the NHCE's on 12/1/15 can be deposited shortly after that date as well as the partners deferrals and safe harbor contribution.

[Bird]

Also think about how significant it is to terminate the plan on 12/1 versus 12/31. There's nothing that says the plan has to terminate on the same day as the partnership, and it might simplify things (no pro-ration of max comp or dollar limits). If it's going to take more than a month to wrap things up and pay everyone out, then it won't make any difference in filing.

[david rigby]

There's nothing that says the plan has to terminate on the same day as the partnership...

Maybe. Check the document. It's possible the document has language that will automatically create a plan termination if the plan sponsor undergoes bankruptcy, or dissolution, etc.

[hr for me]

When I took my current position 11+ years ago, my predecessor had "terminated" an old 401k and just stopped doing 5500s as of the year of termination which was 3-4 years prior to my start date. Imagine my surprise 3 years in when I came to find that there was still a participant with a balance that had never been distributed. I had no contact information with the old recordkeeper (our corp offices had moved 2 times) and it was a nightmare of updating 5500s and paying large fines because she didn't know she had to continue doing 5500s until the balance was 0, regardless of the termination date.

So I think this is actually a pretty common misunderstanding unless you have worked in the 401k business.

[EBDI]

Bird, the plan document does state that upon sale or merger, the company is deemed to terminate its participation in the plan. Otherwise, I would have preferred 12/31.

[QDROphile]

So amend the plan.

[EBDI]

If I amend the plan so that it terminates on 12/31, wouldn't I have a problem with a successor plan? The staff are going to continue working for the new firm.

[Bird]

Whatever. I would terminate it 12/31, and don't care what the doc says. The business has to wind up its affairs and going back to the original Q, yes it can make contributions after the termination date. Somebody tell me what's gonna happen if I choose a 12/31 term date and the plan has some provision about "the company is deemed to terminate its participation in the plan" (which is different from "the plan is deemed to be terminated").