OK to terminate a profit-sharing plan and immediately start a 401(k) p

[John A]

Is there any reason a plan sponsor could not terminate a profit-sharing plan, and immediately start a 401(k) plan?

[Dave Baker]

Has the plan sponsor (or any affiliated entity or predecessor entity) ever had a 401(k) plan that's been terminated?

[Guest]

why terminate and establish a new plan with all the attendant fees and the vesting of participants on termination.

Why not add the 401k feature to the existing profit sharing plan. This should not cost significantly for the amendment. Also participants would not vest fully in their current account balances, and the profit sharing plan would not go through a termination filing with the IRS

[david rigby]

I agree with comment about amend instead of replace.

There might be some good reasons to terminate the existing plan, such as prior violations of statute or regulation, so that the new plan is not "contaminated" by these problems. But if not, then adding the 401(k) feature to the existing plan is much easier, cheaper, and quicker.

[John A]

Dave Baker: Has the plan sponsor (or any affiliated entity or predecessor entity) ever had a 401(k) plan that's been terminated? No

b2kates and pax, I completely agree, but the plan sponsor is being told by someone that they can't or shouldn't do it that way (we're mystified as to why). We had already recommended amending rather than replacing.

However, the question still stands: Is there any reason a plan sponsor (that has never before maintained nor had any affiliated entity maintain any plan other than the profit sharing plan)couldn't terminate a profit sharing plan and immediately start a 401(k) plan?

[david rigby]

I don't see anything that would per se prohibit it. I would want to inquire about the reasoning behind the original advice. Also, it is possible that the advisor may realize some benefit from that action (such as administrative fees) that would not exist if the plan is amended.

[KJohnson]

Depending on how long you have had the PS around I guess it is possible there could be "permanency" questions about the old plan under. 1.401-1(B)(2).

Also, depending on why this is being done and the terms of the two plans, you might want to keep in mind that terminating and establishing plans are considered "plan amendments" for purposes of 1.401(a)4)-5.

I suppose one reason to terminate is that it would essentially allow everyone, regardless of age or the "seasoning" of money to take an "in-service" distribution. They could then roll to an IRA or roll over to a new plan.

Also, could you use termination to get rid of optional forms of benefits that you did not like in the old plan? Any 411(d)(6) issues if the old plan PS Plan is "loaded up" with distribution options and the new 401(k) Plan has only a lump sum?

[PMC]

Still unsure about this one -

Reg. 1.401-6 deals with the termination of a qualified plan. Para.(b)defines a termination and states a plan is not considered terminated merely because an employer consolidates or replaces that plan with a comparable plan. 1.381©(11) describes what constitutes a comparable plan.

An employer currently has a Profit Sharing Plan ('ER $ only) and wants to terminate it, distribute assets to employees and then start a 401(k).

The 401(k) would seem to be a comparable plan.

Would the employer be making an impermissible distribution of those PS $ because the plan wouldn't be considered terminated? (The PSP doesn't allow for any other in-service distributions now.)

Or could the PSP be terminated and assets distributed but the 401(k)would be "viewed" as an amendment and there would be 411(d)(6) considerations?

[Appleby]

I agree with b2kates. A 401(k) plan is just a profit sharing with CODA, therefore, why not just amend the profit sharing plan to add the CODA feature?

Code Section 411(d)(6) addressers the anti cutback rules for optional forms of benefit. I doubt amending a profit sharing plan to add CODA feature would not be seen as cutting back on any optional form of benefit

[Archimage]

It sounds like the client is acting a little funny. I would definitely not trustee the plan if you offer those services and would possibly not take the client at all if they cannot provide you with a plausible explanation as to why they wish to do this.

[Moe Howard]

Hey! Although this "John A" question is old (year 1999) .... it's a very good question.

Does anyone have any current thoughts on this question ?

[KJohnson]

Assuming the profit sharing plan does not contain any "merged money purchase pensoin plan assets, one of the reasons I could think of for terminating rather than amending has gone away. Under the 411(d)(6) regs you can now strip the plan of distribution options as long as you have a lump sum otpion at the same time.