At what point is a 401(k) plan considered "ACTIVE" and would need to go through the plan termination process to close?

[MrsMacias]

Background: Client purchased a plan with automatic enrollment and safe harbor match, with an effective date of 7/1/2021. The plan went live on our system, census was uploaded and participants were notified of their eligibility to participate, received all the required notices, and should have been automatically enrolled if they did not opt out. 

Client has now reached out (along with their financial advisor) saying that they never wanted automatic enrollment, didn't understand it, and now wants to "cancel" the plan. They have not done any withholding of ANY elective deferrals at this time, so the plan has not been funded. 

I am of the opinion that since notices have gone out, accounts have been set up, etc. they have a 401(k) plan, and they cannot just "cancel" it, i.e. pretend it never happened. I know how to correct the failure to automatically enroll participants so that is not the issue. 

Our main point of contention and one I am having difficulty finding any guidance on is; at what point can we say, "sorry, you officially have a 401(k) plan so you have to fund any required contributions and go through the normal termination process to close it"?

I believe the plan is active, and that they need to go through the correction process for the automatic deferral failure and then they can terminate the plan. The client contends that since they have not funded, the plan is not active and we should be able to just "cancel" it.

We've already told them that they can remove the automatic enrollment provision, so that is not the issue. 

If I anyone can point me to some guidance on this topic, it would be much appreciated. 

[Lou S.]

Did they sign the document? If so the IRS thinks they have a plan.

[John Feldt ERPA CPC QPA]

And the courts would also agree.

[CuseFan]

So if they just ignored everything and pretended they never adopted a plan, you can't really stop them and force them to take salary deferrals from employees - but you can resign from the engagement and bill them for the contracted services you performed (document and whatever else) if you haven't done so already.

They assume the risk for non compliance. Maybe they get away with it, or maybe they don't because some disgruntled employee says "Where's the 401(k) plan you said we had? I have this SPD that says I'm automatically enrolled but you're not taking those salary deferrals or giving me matching contributions." and then complains to DOL and/or IRS.

 

[Bri]

How about going in under VCP?