Frozen Profit Sharing Plan

[Catch22PGM]

We have a new client for 2022 that has a profit sharing plan. There have been no contributions to the plan since 2017 (there will be no future contributions) and in the adoption agreement we prepared for them effective 1/1/2022 we indicated that the plan was frozen on 1/1/2022. Their previous TPA never amended their adoption agreement to show it as frozen. We aren't terminating the plan because there are several investments (real estate, private equity) that are not liquid and for some reason the owner doesn't want to find an IRA custodian to deal with it. 

When the plan was established in 2013 there were two 50/50 partners and no employees.  They filed Form 5500-EZ's from 2013 through 2017. They hired an employee mid-2017 who became eligible for the plan on 7/1/2018 but has never received a contribution so has no account balance. They have filed Form 5500 (Schedule I) from 2018 - 2021.

Partner A bought-out Partner B mid-2021 and Partner B's profit sharing plan account balance was rolled-over to an IRA on 12/31/2021.  Now we have a single-member LLC as a plan sponsor for 2022 with one account balance and one employee who does not have an account balance and never will.

Can we file Form 5500-EZ for 2022 forward or are we stuck with Form 5500? I am questioning whether or not the employee needs to be considered a participant because while the plan was not amended to be frozen, it has been frozen for all intents and purposes since 12/31/2017 which was before she became eligible.

 

[Bri]

The freezing of the plan would have had to freeze eligibility for participation, too, as opposed to just new contributions.

I think you've got an actual participant there in the employee.  Did newly freezing the plan also put the employee into an ineligible class?

[Nate S]

Sounds like they met statutory eligibility, and assuming no BIS, can't have their service wiped away.  Any contribution expected for 2022?  If not, you have a discontinuance and will need to make sure the participant is 100% vested as of 12/31/22.  And yes, stuck with 5500/SF, no EZ allowed while they're still employed.

[Catch22PGM]

Thank you Bri and Nate S.  You are both confirming what I suspected - that employee is a participant and they are stuck with 5500's instead of 5500-EZ's.  The section of the adoption agreement says:

a. [ X ] The Plan is frozen as to eligibility effective: 01/01/2022
b. [ X ] The Plan is frozen as to benefit accruals effective: 01/01/2022

The participant isn't and never has been in an ineligible class.  There won't be any future contributions and since the employee doesn't have an account balance, we aren't concerned with vesting.

[Bri]

I was thinking out loud, if she were in an ineligible class, the plan still wouldn't have a 410(b) issue without any contributions being allocated.  And then there would legitimately be only one owner-only participant covered under the plan.  I might want to do extra reading on the idea of the plan preserving benefits for a select group of HCEs simply because I can't remember off the top of my head whether that description arises in a situation similar/identical to this.

[Luke Bailey]

I will be interested if anyone else sees this differently, but if this is not a 401(k) plan, just a profit sharing plan, and the employee never received a contribution (and this conformed with the plan document and law, e.g. top-heavy rules), I don't think that individual is a participant. I think the rule that you are a "participant" for 5500 purposes merely based on eligibility is only for K plans.

[chc93]

44 minutes ago, Luke Bailey said:

I will be interested if anyone else sees this differently, but if this is not a 401(k) plan, just a profit sharing plan, and the employee never received a contribution (and this conformed with the plan document and law, e.g. top-heavy rules), I don't think that individual is a participant. I think the rule that you are a "participant" for 5500 purposes merely based on eligibility is only for K plans.

I think I see this differently.  The 5500 instructions defines "active participant" as follows:

*******************

1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan.

*******************

Only reference is to employee service and not dependent on having benefits in the plan.  So a profit sharing plan where a participant never got a contribution allocation is a participant for 5500 purposes.  I've been doing it this way.  

 

[Luke Bailey]

2 hours ago, chc93 said:

I think I see this differently.  The 5500 instructions defines "active participant" as follows:

*******************

1. Active participants (i.e., any individuals who are currently in employment covered by the plan and who are earning or retaining credited service under the plan). This includes any individuals who are eligible to elect to have the employer make payments under a Code section 401(k) qualified cash or deferred arrangement. Active participants also include any nonvested individuals who are earning or retaining credited service under the plan.

*******************

Only reference is to employee service and not dependent on having benefits in the plan.  So a profit sharing plan where a participant never got a contribution allocation is a participant for 5500 purposes.  I've been doing it this way.  

 

Yeah, you're probably right, chc93. I think I was distracted by the specific inclusion of 401(k) eligible. If you're right (and again, you probably are), they wouldn't have needed to say that. Thanks.