Terminating participating employer of a PEP plan - spin-off required?

[MrsMacias]

We are administering a PEP plan and one of the members wants to terminate. From our understanding, since only the plan sponsor has the authority to terminate a 401(k) plan and in PEPs the sponsor is the PPP, in order to terminate, the member must spin off their plan from the PEP and then terminate that plan.

However, our PPP is insisting that this is not needed and that they can terminate this individual adopting employer without a spin-off. We are having a hard time finding actual guidance on this. Who is correct?

[G8Rs]

Your understanding is correct. The problem is that there is no formal guidance on the issue. With pre-approved plans, the IRS requires the spin-off/termination. The reasoning is that distributions may be on ‘plan’ termination. So there must be a plan that is terminating, not just an employer ceasing to participate. The 2-step process seems like a waste, but it’s certainly the safest way to go.  

[MrsMacias]

4 minutes ago, G8Rs said:

Your understanding is correct. The problem is that there is no formal guidance on the issue. With pre-approved plans, the IRS requires the spin-off/termination. The reasoning is that distributions may be on ‘plan’ termination. So there must be a plan that is terminating, not just an employer ceasing to participate. The 2-step process seems like a waste, but it’s certainly the safest way to go.  

Thank you! Just wanted to make sure we were on the right track. 

[Bruce1]

On 10/25/2024 at 4:17 PM, G8Rs said:

With pre-approved plans, the IRS requires the spin-off/termination.

I'm unfamiliar with the spin-off how does that work? 

[Peter Gulia]

For the two steps G8Rs describes—(1) a spinoff transfer followed by (2) the transferee plan’s termination and final distributions:

Does a pooled employer plan’s provider offer as a separate service for a separate fee, implementing the creation and termination of the transferee plan?

Is it feasible to pay the transferee plan’s final distributions as quickly as 30 days after the spinoff from the pooled employer plan?

[RatherBeGolfing]

3 hours ago, Peter Gulia said:

Does a pooled employer plan’s provider offer as a separate service for a separate fee, implementing the creation and termination of the transferee plan?

Depends on the provider.  We do, and I have seen other providers that offer this service for a minor fee.  I have also seen providers that say "not my problem".