Timing of plan termination when employer no longer exists

[ldr]

Hi to All,

We have a client who sold his business and ceased making payroll as of 10/06/2020.  He let us know that we needed to terminate his (calendar year) 401(k) plan and we made the termination date of the plan 10/06/2020, which means we had to prorate the 415 limit and thus the client will not get to put in the full amount for himself that he would have had if the plan had run up until 12/31/2020.  He is not happy with us and feels like his limitations are our fault.

Did we make a mistake in terminating the plan to coincide with the business being sold and ceasing to make payroll?  We have never done it any other way, but then we've never had a complaint before.

Could the plan have run through 12/31/2020?

Thank you in advance for your ideas.

[ldr]

I have been researching this since I put up the question and I have some information to add.  This is a small, sole proprietor/doctor's office with less than 10 employees.  The sale was an asset sale.  The sole proprietorship continues to exist and the doctor continues to receive revenue that he will report on his Schedule C.  All the rest of the employees were hired by the new owner on 10/06/2020.

We are leaning in the direction of saying that because the sole prop still exists, because he still has income coming in, and because this was an asset sale and not a stock sale, we could have let this plan terminate on 12/31/2020 and he could have the full deduction for the full year's contribution.

I can't find this exact scenario and these exact questions addressed.  Everything dances all around it and gives little tidbits without hitting the question directly on the head.

Would still like to hear from anyone with experience in this matter.

 

[Bill Presson]

With it being an asset sale, the termination can be 12/31/20. It could even continue into next year. The employees are all 100% and considered terminated. So watch the coverage and discrimination tests in the contribution.

[ldr]

@Bill, thanks so much!

[david rigby]

Agree.  I have seen examples where a plan was "un-terminated" by amendment, and then a later termination date was selected.  Just be sure someone creates the proper plan amendment(s).  You should rescind the termination before the plan year end.