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Plan that never really starts...need for termination?


RayRay

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A customer engaged us to prepare a non-SH 401(k) plan document for them in mid-2022 with elective deferrals to begin in the 4th quarter of the year. We prepared the document and they signed it.  We've received word from the advisor that they've never collected or contributed a cent into the plan, and whether or not they ever gave their employees copies of the SPD or had an enrollment meeting is unknown at this time. 

I was wondering what the board feels is appropriate with regarding to formally terminating the plan. I've heard the argument that if the plan is never funded it never really starts, but I don't know if I can get behind that. In my mind, the execution of the plan document creates an obligation on the part of the plan administrator to operate the plan according to its terms, and there's an operational failure resulting in a missed deferral opportunity as a result. I haven't been in the industry that long, so I'm not sure what the commonly accepted practice would be in this situation. Any thoughts?

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  • 2 weeks later...

The IRS position is you have a 401(k) plan and required Form 5500 filing until you terminate the Plan. That is you have eligible participants who have not elected to defer. So you have a plan just with $0 assets. I would say the Plan needs to be formally terminated and 5500 would be required for 2022 and 2023 though those 5500s should be quite easy. Hopefully it's a small plan with fewer than 100 participants so you don't need an audit.

Anyway that's the correct way to do in my opinion.

If they don't want to do it that way and just want to walk away to save expense, you should formally resign and let them know what their requirements are but that you will not be responsible. A CYA letter so to speak.

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On 2/2/2023 at 1:51 PM, Lou S. said:

The IRS position is you have a 401(k) plan and required Form 5500 filing until you terminate the Plan. That is you have eligible participants who have not elected to defer.

If you didn't tell anyone about the plan, then you have improperly excluded participants.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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