I recall the recommendation that a contribution to a DC plan, even just a small deposit, should be contributed at least once every three years in order to show the intent of permanency.  This was presented to me as a guideline rather than a regulation.  Presuming this is not a regulation, if the sponsor of a profit sharing plan has said it will not make contributions for at least five years, would the plan be required to be frozen via amendment if it is to keep operating?  If so, what would be the latest effective date for the amendment, the start of the fourth plan year after the year for which the most recent contribution was made?  Due to the plan holding many illiquid assets across numerous accounts, the sponsor has said it would be preferable to keep the plan going and pay admin fees than to try to liquidate/rollover the assets and then go through the trouble of starting up a new plan sometime in the future.            

Here’s the Treasury department’s 1960 interpretation.

26 C.F.R. § 1.401-1(b)(2)-(3) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401-1#p-1.401-1(b)(2).

One might interpret this interpretation, including by considering coverage, nondiscrimination, and top-heavy rules as they apply for the years involved.

The only issue with not making substantial and recurring contributions to a PS plan is vesting, IMO. You do not have to amend/freeze.

Agree with Bird - what you end up having is a "complete discontinuance of contributions" which should be referenced in the plan document and is somewhat like a partial termination but with respect to current active participants who must be made fully vested. It is likely in the plan termination or partial termination area. I'm not sure if any terminated participants without full vesting who have not yet forfeited non-vested balances need to be fully vested, but I expect at least one of our very knowledgeable colleagues on this forum knows that answer.

On 10/4/2022 at 12:48 PM, CuseFan said:

It is likely in the plan termination or partial termination area.

CuseFan, if you're referring to the reg, it's 1.401-6, which is pre-ERISA.

On 10/4/2022 at 12:48 PM, CuseFan said:

I'm not sure if any terminated participants without full vesting who have not yet forfeited non-vested balances need to be fully vested

I think it's anyone with a balance, just like you have with a termination. The complexity that comes up is, if you have, say, 5 years with no contributions, and the employer says it had an intent to contribute in the early part of that period, but just didn't have the money, and in year 5 wants to freeze the plan, and reports that it had not had an intent to contribute for the last 3 years, really, when do you declare full vesting? 5 years ago because there were no contributions? 3 years ago because that's when they should have frozen the plan? Now, because that's the most practical? It's a facts and circumstances determination and I don't recall there being any clear guidance.

Thanks Luke, good to know. Yes, those are some weird rules. It's not like participants only earned vesting service for years in which profit sharing contributions were made. 

25 minutes ago, Luke Bailey said:

It's a facts and circumstances determination and I don't recall there being any clear guidance.

Agree.  FWIW, I checked the Gray Book (discontinued after 2015) and found nothing on point.  @Luke Bailey, might there be a relevant Q&A in some prior IRS/ABA conversation?

2 hours ago, david rigby said:

Agree.  FWIW, I checked the Gray Book (discontinued after 2015) and found nothing on point.  @Luke Bailey, might there be a relevant Q&A in some prior IRS/ABA conversation?

david rigby, good chance, but I don't know. If there is, it might be old. I did an article on this topic 25 or so years ago. It lost some of its currency when the world went from profit sharing plans to 401(k), because now there's a much lower probability of a plan going without any contributions for a long srretch.

How about a plan that has been existence since 2012 and has never had a contribution? A 0 Form 5500-SF has been filed every year since inception. Could you not say this plan is terminated by operation of law?

3 hours ago, bzorc said:

How about a plan that has been existence since 2012 and has never had a contribution? A 0 Form 5500-SF has been filed every year since inception. Could you not say this plan is terminated by operation of law?

Maybe, but better to formally terminate. If never had a contribution, the fallout should not be great.

No Contributions to your Profit Sharing/401(k) Plan for a While? Complete Discontinuance of Contributions and What You Need to Know

While plan sponsors aren’t required to make contributions to their profit sharing/401(k) plan every year, contributions must be “recurring and substantial” for a plan to be considered ongoing. Employee Plans Exam guidelines state that if the employer hasn’t made contributions in three of the past five consecutive years, the plan may have incurred a complete discontinuance of contributions.

When a complete discontinuance of contributions occurs, the plan sponsor must treat the plan as a terminated plan and fully vest all participant accounts for the plan to remain qualified. Determining if there’s been a complete discontinuance of contributions is based on facts and circumstances, for example, the plan sponsor’s history of profitability, and the probability of future contributions from the sponsor.

During its Complete Discontinuance of Contributions Project, the Employee Plans Compliance Unit (EPCU) looked at Forms 5500 and 5500-SF showing both:

• No contributions for the preceding five years (excluding 401(k) plans’ employee deferral contributions)
• Distributions

Project Goals

• To determine if a complete discontinuance of contributions occurred
• If there was a complete discontinuance of contributions, to ensure participants were correctly 100% vested
• To determine if plan participants were incorrectly identified as partially vested terminated participants on incorrectly prepared Forms 5500/5500-SF

Project Results

The EPCU found plans that had experienced a complete discontinuance of contributions. Most of these employers did correctly 100% vest plan participants, but a few employers were unaware of this requirement. These employers corrected this vesting error for all affected participants through the Employee Plans Compliance Resolution System (EPCRS).

Additional findings included:

• Plan sponsors who incorrectly identified participants on the Form 5500 as terminated with less than 100% vesting. These plan sponsors filed an amended Form 5500.
   
• Cases in which facts and circumstances indicating the failure to make plan contributions didn’t rise to the level of a complete discontinuance. We informed plan sponsors of the law on complete discontinuance of contributions for future reference.

Planning Tips

If you haven’t made contributions to your profit sharing plan for three of the past five years, consider the facts and circumstances to determine if a complete discontinuance of contributions has occurred:

• Your history of profitability/ability to make contributions.
• Whether you’ll be able to make contributions in the future.

Correction

If you’ve had a complete discontinuance and have made partially vested distributions, the plan’s qualification is at risk. You can fix this failure through EPCRS. Correction requires restoring previously forfeited accounts to affected participants, adjusted for lost earnings.

If your filed Form 5500/5500-SF incorrectly identifies partially vested terminated participants, fix the error promptly by filing an amended return.

Contact us

If you have questions about this project, email us and include “Complete Discontinuance” in the subject line. Make sure you include your telephone number so we can contact you with answers. We’re sorry, we can’t answer technical questions unrelated to your compliance check. If you have account specific questions, see EP Customer Account Services.

Page Last Reviewed or Updated: 17-May-2022

https://www.irs.gov/retirement-plans/no-contributions-to-your-profit-sharing-401-k-plan-for-a-while-complete-discontinuance-of-contributions-and-what-you-need-to-know