No PSP contributions in 8 years--ramifications?

[BG5150]

No contributions made to profit sharing plan for at least 8 years.  PS only plan.

I guess the contributions are no longer substantial and recurring.  So 100% vesting is probably triggered.

Are there any other ramifications?

[Mike Preston]

Probably disqualification because the 100% vesting takes place when the contributions stopped, per the IRS.

[ESOP Guy]

Something in the back of my mind says the number of years without a contribution triggered a presumption of a plan termination but it could be refuted on a facts and circumstances basis. 

If they have a long history of putting in a contribution and then 2008 happened and they are still working to regain their financial stability can you make a case there has been no plan termination? 

I could be wrong but something in the back of my mind is going that way. 

[Mike Preston]

I would always take the position of it being a rebuttable presumption if representing the client. But something is telling me, in the back of my mind, that there is a court case that the IRS won on just this point.  Maybe somebody else can conjure it up.

[Kevin C]

I think the presumption that no contribution for 3 out of 5 years is a discontinuance comes from Announcement 94-101.  It's currently described on the IRS website, along with the mention that the history of profitability and the ability to make future contributions can affect the determination of a discontinuance.  With no contributions in at least 8 years, I don't think you would be likely to convince the IRS it wasn't a discontinuance.

https://www.irs.gov/retirement-plans/no-contributions-to-your-profit-sharing-401-k-plan-for-a-while-complete-discontinuance-of-contributions-and-what-you-need-to-know

 

Planning Tips

If you haven’t made contributions to your profit sharing plan for three of the past five years, consider the facts and circumstances to determine if a complete discontinuance of contributions has occurred:

• Your history of profitability/ability to make contributions.
• Whether you’ll be able to make contributions in the future.

[Mike Preston]

My point was that if the IRS considers it a discontinuance, it does so as of the date of the last contribution.  And that is a problem.

[Bird]

It's only a problem if participants were paid out at less than 100%.  Do we know that?

[Kevin C]

It's been a while since I've had this come up, so I looked it up.

Quote

1.411(d)-2(d)(2) Time of discontinuance. In any case in which a suspension of a profit-sharing plan maintained by a single employer is considered a discontinuance, the discontinuance becomes effective not later than the last day of the taxable year of the employer following the last taxable year of such employer for which a substantial contribution was made under the profit-sharing plan. In the case of a profit-sharing plan maintained by more than one employer, the discontinuance becomes effective not later than the last day of the plan year following the plan year within which any employer made a substantial contribution under the plan.

 

Like Mike says, when you determine you have a discontinuance, it applies retroactively, so in most cases, you've already forfeited someone who becomes 100% vested by the discontinuance. 

[BG5150]

no one paid out at less than 100% vested.

[imchipbrown]

I recall a restatement period (EGTRRA or earlier?) when our firm merged several non-contributing Profit-Sharing Plans into (new or existing) 0% Money Purchase Plans.

[BG5150]

So, if there are/were no <100% vested distributions, and the plan is kept updated (and teh client continues to pay our fee), do we have any other concerns?

[Belgarath]

Not from my viewpoint. I've seen plans like this before. Everyone is 100% vested, and it just goes merrily along. Sometimes they actually intend to start contributing again if business improves, sometimes they want the added shield from a lawsuit judgment, etc., etc.

These are sometimes small/family plan situations, so if it goes on a long time, might be worth consideration of having a successor trustee in place, (if there isn't already) depending upon age and/or health of the owner.

[BG5150]

Owner is only in his 50's

[Tom Poje]

perhaps (via my 'logic', which is way below Spock's logic)

not much different between your non contribution plan and a frozen plan. many moons ago, the min participation rules applied to dc plans as well. so, from ERISA Outline Book Chapter 8 section X part G

 

2.b.Practical effect on frozen plans. A frozen defined benefit plan would have to pass the prior benefit structure test on the basis of accrued benefits, since employees are not accruing additional benefits. In its preamble to the §401(a)(26) regulations, the Treasury cited frozen plans as a primary target of the prior benefit structure test. The Treasury is attempting to discourage long term maintenance of frozen plans as a means of sheltering a potential surplus of assets if the plan were to be terminated. As there is turnover of the work force, and terminated participants receive distribution of their accrued benefits, fewer employees and former employees will have accrued benefits remaining in the frozen plan. At some point, the number with accrued benefits will fall below the §401(a)(26) threshold and the plan will no longer satisfy the prior benefit structure test

..........

thus, it seems more a 'loophole' because min partic rules no longer apply - but your plan doesn't get by this test (probably), though I suppose the govt could argue that since contrib are not recurring then it should be terminated, not just 100% vesting. of course there is no sheltering of excess assets, but if you pay people out and they don't make rollovers, then our friendly folks get some more tax revenue.

[Belgarath]

Good point, but this is a Profit Sharing plan, so nothing to worry about from this angle, right? I'm not entirely certain what you are saying.

[Tom Poje]

my only point being, it seems a bit illogical that if this was a frozen DB plan, you would have to pay everyone out, but if it was a "frozen" DC you don't. have to and can leave it sitting around as long as you want.

(so perhaps the IRS would latch onto something and say "you need to shut the puppy down"

[Bird]

48 minutes ago, Belgarath said:

Good point, but this is a Profit Sharing plan, so nothing to worry about from this angle, right? I'm not entirely certain what you are saying.

I don't think you have anything to worry about.  I followed this thread and found a reference to an IRS manual which led me to this page which says this (my emphasis, and keep reading for an additional comment below...sorry about stray outline marks):

 

 

Quote

 

7.12.1.4  (02-16-2017)
Discontinuance of Contributions

1. This section only applies to plans that are not subject to IRC 412, such as profit sharing and stock bonus plans. For plans subject to IRC 412, see IRM 7.12.1.18, Minimum Funding Standards.

2. Pursue a possible discontinuance of contributions only if there are participants who had forfeitures during the years under consideration. See Form 5310, line 19(b).

 

1.  

It also says that the discontinuance becomes effective the year after the last contribution year, FWIW:

Quote

 

Under 26 CFR 1.411(d)-2(d)(2), a complete discontinuance becomes effective:

1. For a single employer plan, the last day of the employer’s tax year after the tax year for which the employer last made a substantial contribution to the profit-sharing plan.

 

1.  

 

[My 2 cents]

For what it's worth, I continue to hold to the views I expressed 4 years ago in a discussion thread here on 401(a)(26) and frozen defined benefit plans.  Hard frozen defined benefit plans will seldom need to take action under 401(a)(26), whatever happens to the employer's demographics. The only part of the 401(a)(26) regulations that can matter for a hard frozen defined benefit plan is passing the prior benefit structure test.  Such plans are (according to my understanding) entirely exempt from the 40% of non-excludible employees or 50 people requirement under those regulations.