short plan year failed ADP

[R. Butler]

Calendar year plan terminates August 4th.  The plan failed the ADP test.  Refunds made in December.  Plan sponsor is being told that the excise tax normally assessed on refunds made more than 2 1/2 months after the end of the plan year would not apply.  They are being told that even though the plan terminated creating a short plan year that the normal 03/15 deadline for calendar year plan still applies.

I don't find anything that indicates that the excise tax isn't required in the is circumstance.  Am I missing something?

Thank you for your help.       

[Mike Preston]

Why do you think that a plan termination forces a short plan year for this purpose?

[R. Butler]

Why wouldn't it?  

If a resolution is prepared indicating that the plan terminated on 08/04.  If all contributions to the plan ceased as of 08/04; you complete the ADP testing on a short year basis.  What is the basis for asserting that you have until 03/15 under these circumstances?  Is the assertion that the plan didn't terminate until all assets were distributed?  

If that is the assertion then does the answer change if the plan sponsor was acquired, terminated their plan and them the assets were merged into the acquiring company's plan?  In that case the plan doesn't have assets after they are merged.  Would that start the 2 1/2 month distribution period?

Thanks for any guidance.

[Lou S.]

Are you going to file a short plan year return for the 1/1/16 - 8/4/16 "plan year"? Somehow I think not.

[ETA Consulting LLC]

I haven't seen this one in a while.  I'm of the impression that a plan termination doesn't create a short plan year, but does create a short limitation year for Section 415.

I don't know if anything has changed since I got that impression. May be worth looking in to.  However, if you actually amended the plan to create a short plan during during the plan termination, then you may have 'screwed the pooch'.

Good Luck!

[Tom Poje]

at the 2010 ASPPA Conference, Q and A #3

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?

IRS Response:

(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

..............

As I recall, the IRS in the discussion added if the assets weren't paid out within a reasonable time then top heavy is based on full year of comp.

of course such IRS responses don't necessarily reflect an actual Treasury position. And this is top heavy, not ADP testing, but I don't see why the logic is any different. I suppose it begs the question. Just what is meant by 'short plan year'. certainly the 5500 is not a short plan year in either your ADP test or the top heavy test in the Q and A.  but in the case of the top heavy the IRS agreed the top heavy was not 'full year comp' but 'short plan year'!

so now, if you are going to say you don't have a short plan year, then do you also say that even though deferrals stopped, I get to use full year comp for testing?

[R. Butler]

14 hours ago, Lou S. said:

Are you going to file a short plan year return for the 1/1/16 - 8/4/16 "plan year"? Somehow I think not.

Not on this situation because all assets weren't distributed, but if it was a merger situation you would.  Would that change the answer?

[BG5150]

A plan term doesn't necessarily create a short plan year for the 5500, but I think a plan termination date of 8/4 creates a short plan year for other purposes, such as the limitation year and testing.

[Mike Preston]

Only commenting on one thing: the IRS has stated that a plan termination does not create a short year for purposes of eliminating the ability to combine plans for testing.

[Lou S.]

5 hours ago, R. Butler said:

Not on this situation because all assets weren't distributed, but if it was a merger situation you would.  Would that change the answer?

If you have a short plan year either due to distribution of assets or merger my answer would change.

I'm not sure there is any specific guidance on point with your question as I would argue you don't have a short plan year and you have until 2.5 months after the end of the Plan year which is 12/31/16.

I think there is some recent guidance on terminating DB plans where the 8.5 month minimum funding deadline is from date of termination I believe so you could argue your point that it was due 2.5 months after the August termination date but I wouldn't tax that position to pay an excise tax that might not even be due.

 

 

 

 

[John Feldt ERPA CPC QPA]

3 hours ago, Mike Preston said:

Only commenting on one thing: the IRS has stated that a plan termination does not create a short year for purposes of eliminating the ability to combine plans for testing.

Where did they say this? If a calendar year DB plan terminates July 31 and it is all paid out November 30, it can still be combination tested for nondiscrimination with the ongoing calendar year 401(k) plan? Did they cite an authority?

[Mike Preston]

Pretty sure it was at ASPPA annual 2016, but no guarantees.