Plan Termination and 415 Limit

[NW529]

A 401k plan is on a calendar year and ceases contributions in March. However, the effective date of the termination is in July. Which date is used to determine the prorated 415 limit?

If the employer had already ceased contributions with the intention to terminate, but did not make the effective date until several months after, aren't they essentially increasing the contributions allowed by the prorated 415 limit? 

Any guidance is appreciated! 

[Belgarath]

If the plan termination date is a date other than the last day of the plan's limitation year, then yes, the 415 limit is prorated. So if the official termination date had been March 31, then the 415 limit would be the lesser of 100% of comp or 3/12 of the 415 dollar limit. If instead you change the termination date to July 31, then yes, the 415 dollar limit will increase to 7/12.

Now, if they ceased contributions in March without any amendment, I'm assuming they were solely discretionary contributions, otherwise, they have problems...

[Tom Poje]

if the plan is top heavy, there may be other issues if assets are not distributed timely. (usually within 1 year)

 

A plan will be considered to be terminated if there has been a formal termination date. At the 2010 ASPPA Conference (Q and A #3), the following question was asked:

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.)

The IRS response was: 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.

[NW529]

@Belgarath - Yes, the contributions in question are elective deferrals. 

@Tom Poje - The plan is not Top Heavy for 2019, so I think we are okay. 

Thank you both for your help!