401k Termination with Partners

[Gilmore]

A partnership (2 partners) with a safe harbor match 401(k) wants to terminate the plan.  Plan is top heavy.  Historically the partners' K1s are not completed until late September of the following year.  Also historically, the partners make deferrals during the plan year which are matched, usually incorrectly and corrections are needed after the K1s are available.

To terminate the plan I was thinking we remove match for HCEs (the 2 partners are the only HCEs) starting 1/1/2026, and terminate the plan in 2026 after the K1s are completed and we know that we have the correct match for 2025.  Currently there is enough funds in the forfeiture account to fund the 2026 safe harbor match for the non-HCEs, and there is a very low risk that the partners 2026 K1 compensation would not support their salary deferrals, which I'm sure they would continue to make.

Appreciate any feedback or ideas.

Thank you.

[Lou S.]

I guess it depends on whether or not they want contributions for the 2026 year. If they do and you terminate without a 12 month plan year for 2026 you'll lose safe harbor status have ADP/ACP testing and still have TH minimums to worry about for the non-keys so just be mindful of timing. At least that's my understanding. Unless they meet one of the exceptions for terminating a safe harbor plan mid year and retaining SH status.

Of course with the partnership you could make the termination date 12/31/2026 and just start paying out employees after the common law employees are let go then still be a SH for 2026.

If they don't want 2026 contributions, terminated 12/31/2025 and just wrap up everything in 2026.

[Paul I]

@Gilmore , is the business being terminated or does the partnership only wish to terminate the plan but the business will continue?

If the business is continuing, then you may want to get a clear understanding of the partners' motivation for wanting to terminate the plan, and work with them on how best to attain their overall objectives. 

For example, do they want to terminate because:

• they think the cost of contributions for employees is too much?
• they think the top heavy contribution is "unfair"?
• they think the cost of plan administration is too much?
• they think the plan overly complicates their personal tax filings?

It also would be worth having a conversation about their view on accumulating tax-privileged assets towards their own retirement.

Are they proverbially throwing out the baby with the bath water?

[Gilmore]

They have had a decline in business over the last couple of years.  Employee count is down and very little participation by the employees who are left.  Although the business is continuing they are also losing a key person who was handling the day to day operation of the plan and they don't want to train someone new.