Successor Plan & adoption vs effective date

Er terminates plan 12/31/21.

All assets distributed by 3/31/22

Company wants to start new plan as of 4/1/23 for 401(k).

• Question 1: is there an issue with adopting it prior to 4/1/23 (ie within 12 months of distribution of assets in prior plan, even though plan won't be effective until after 12 months)

Alternatively Company wants to adopt the plan after 3/31/23, but make PS effective 1/1/23

• Question 2: Being adopted after 12 months, then calculating back to 1/1 - does that violate the successor plan rule?

Great questions. The regulations use the words "in existence". If you adopt a plan now that is not effective until 4/1, is it in existence now? I wouldn't think so but who knows? If you adopt after 4/1 but have effective 1/1 (for PS anyway), is it in existence at 1/1? Maybe yes, maybe no, but it's treated as there for tax and other purposes. Other constructs often refer to the later of the adoption date or effective date but I don't know if I'd hang my hat on that. The safest bet is making it all effective 4/1. I'd spell out the options, lack of regulation clarity and the associated risks and benefits of each option and then let the client decide.

How about a 4/1 plan effective date with a full calendar-year-ending-in-the-plan-year limitation year?

On 1/31/2023 at 1:41 PM, Bri said:

How about a 4/1 plan effective date with a full calendar-year-ending-in-the-plan-year limitation year?

Bumping this thread because this is the exact question for which I cannot find an answer. I think that having the limitation year overlap the 12 month "time out" period could/should/would violate the successor plan issue. But, for the life of me, I can't find an actual answer on this.

FWIW...I'm not sure there is an answer that can be specifically supported by a line in the regulations. IMHO, it would be overly aggressive to give your blessing to this approach. In the absence of a favorable opinion from counsel, I'd say don't do it.

The Treasury department’s interpretive rule does not specify how to determine when a plan “exists”.

I imagine many of us might often suggest interpretations that not only follow reading the statute’s and the interpretive rule’s texts but also follow an assumed purpose of not allowing the employer’s new plan’s participants to make elective deferrals until 12 months after the last of the final distributions from the terminated plan.

26 C.F.R. § 1.401(k)-1(d)(4)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-1#p-1.401(k)-1(d)(4)(i).

But if a decision-maker or adviser is considering possible interpretations and evaluating risks about when the next retirement plan “exists”, consider this:

The consequence from an “alternative defined-contribution plan” that “exists” too soon falls on the terminated plan. It’s the terminated plan that will have provided a distribution without waiting for severance-from-employment, age 59½, or some other distribution-allowing condition because the plan’s administrator believed that the distribution was a § 401(k)(10) termination distribution. So, it’s the terminated plan that would have had a provision that resulted in ostensible elective deferrals that might not have tax-qualified as a § 401(k) cash-or-deferred arrangement (and further might have tax-disqualified the terminated plan).

This is not advice to anyone.

I think making a 401(k) Plan that over laps the 12 month successor plan rule is problematic. 

I think having 2 plans the 401(k) for the short plan year and PSP for the full year are fine, then merge the 401(k) Plan into the PSP would work.

I have no legal support for this, just a conservative approach that I think might work so asking ERISA counsel might be prudent.