401(k) Successor rule applies to effective date or adoption date?

[solo401kperson]

I had a solo 401(k) that had a plan termination date of 12/31/21. All assets were distributed as of 3/21/22. To avoid the successor rule, I waited more than 12 months before establishing a new plan. I signed the adoption agreement for a new 401(k) on 12/12/23 but, following guidance on the application to typically have an effective date as of the start of the plan year, I put an effective date of 1/1/23. I realize now that perhaps this effective date should have been 3/22/23 or later to be a full year after 3/21/22.

For purposes of the successor rule, does the effective date matter or just the adoption date? If the effective date is wrong, how can I proceed? File an amendment? Shut down and make a new one? There are no assets in the account yet.

 

 

[Luke Bailey]

solo401kperson, off the top of my head I can't think of a case or IRS guidance that addresses this little detail. The regulation that establishes the rule you're trying to comply with, Treas. Reg. 1.401(k)-1(d)(4), uses the term "exists" to state what the new plan cannot do within the 12-month period following the complete distribution of the old, terminated plan's assets. Most people would say that your new plan didn't "exist" before you signed the adoption agreement. On the other hand, some of the limits that will apply to your plan will be higher (although you may not need them to be higher) based on the 1/1/2023 effective date, so arguably the plan existed as of 1/1/2023 retroactively.

The first argument (i.e., that the plan did not exist until you adopted it) seems much stronger, because no direct transfer vehicle for the distributed balance(s) from the old plan existed until the new plan's trust was actually established. But absent specific guidance, it might be possible for an IRS EP agent to take the other view, or for another service provider to question this. I would review the specifics (e.g., whether you are getting any benefit from the retro effective date) with my adviser based on the specific facts of your plan and the situation of your business and workforce before 1/1/2024.