frozen 401k / loans & hardship distributions

[KEM]

I think this is correct, but as a sanity check since it seems harder than expect to find authority on this - if a 401(k) plan is frozen, it's still permissible for participants to take out new loans and hardship withdrawals, correct?

[Mike Preston]

Loans and hardship distributions are not 411d6 protected. So the document could have been changed when it was frozen to eliminate either or both. So what does the document say?

[Lou S.]

What is a frozen 401(k) plan? If it a 401(k) plan that was amended to a profit sharing plan by removing the elective deferral component of the plan?

 

 

[KEM]

@Mike Preston - thanks, we're working on the amendment now, so not bound to anything yet.  The current plan doc allows for both.  We're going to freeze participation and employee contributions.  So assuming we draft the amendment in a way that doesn't alter the existing loan/hardship withdrawal provisions, those would remain in effect and be permissible following the freeze to contributions/participations, correct?

[Mike Preston]

1 minute ago, KEM said:

@Mike Preston - thanks, we're working on the amendment now, so not bound to anything yet.  The current plan doc allows for both.  We're going to freeze participation and employee contributions.  So assuming we draft the amendment in a way that doesn't alter the existing loan/hardship withdrawal provisions, those would remain in effect and be permissible following the freeze to contributions/participations, correct?

IMNSHO, yes.

[KEM]

Thank you!

[ErnieG]

It has been my understanding that contributions to a Profit-Sharing Plan must be “recurring and substantial” over time for a plan to be considered ongoing and remain viable [Treas. Reg. § 1.401-1(b)(2)]. 

If the contributions cease to be made, I believe a complete “discontinuance of contributions” has occurred in which would trigger Plan termination and complete (100%) vesting of participants’ accounts [Treas. Reg. § 1.411(d)-2(a)(1)]. This contrasted with a “suspension of contributions” under the Plan, which is merely a temporary cessation of contributions by the employer.

We have, in these cases where the employer wishes to suspend their Profit-Sharing Plan, established a Money Purchase Plan with 0 contribution.  I am curious as to the wording of the amendment and how it would satisfy the “substantial and recurring” element not to be considered a discontinuance of contributions.

[Bird]

48 minutes ago, ErnieG said:

We have, in these cases where the employer wishes to suspend their Profit-Sharing Plan, established a Money Purchase Plan with 0 contribution. 

Curious about the reasoning for this - to somehow eliminate 100% vesting?  IMO that's just certifying a “discontinuance of contributions.”  I've heard of using a 0% MP plan for rollovers, although I'm not sure about that logic either.

[Mike Preston]

I've seen the IRS mandate 100% vesting. I've not seen them claim that the plan has been terminated.