Business Closing

I have always understood that a pension plan must have a business to sponsor it.  If the business closes then the plan must close.  It's as simple as that, correct? A client want's to keep the plan going so that if by chance down the line he want to take a loan he could.  I advised him that if he can't keep the plan if he closes his business.  

How about setting up a sole prop with a minimal activity.? Must file schedule c every year though

let's think about the meaning of the "business' closure".  If the business is sold (stock transaction), then yes, it is closed from the original Owner perspective.   And the plan btw follows the business.  If it is sold as assets sale (or simply stopped the business activity all together), the original business still exists albeit not doing any business activity.  In that case I think there is some grace period (1 year? may be even more) before the Owner has to do something.   But this really becomes a question for the CPA.

Read the document.  It may already have something to say about this.

Hi David

Are you referring to the 1 grace period that may be in the plan document?

If not, what else are referring to?

Thanks

Green, you need to provide some additional information that is fundamental to making a decision about what to do with this plan.

You mention pension plan, but do not say if the plan is a pension plan in the ERISA sense (defined benefit, cash balance, money purchase plan) or you are using pension plan in the generic sense which would include 401(k) and profit sharing plans among others.

You only mention an owner but do not indicate if there are other participants in the plan.

The plan very likely uses a pre-approved plan document, and the authors of pre-approved plan document are fastidious about provisions regarding who is the Plan Sponsor, what are constraints on the employers who adopt the pre-approved plan, and sometimes what happens when a Plan Sponsor is not available (e.g., an abandoned plan, or a sole proprietor dies and there are employees remaining in the plan).  Repeating mantra along with everyone else - read the plan document, and most importantly, this includes the basic plan document that accompanies an adoption agreement.

Assuming the owner finds a viable path forward to keeping the plan, the owner needs to consider if the cost of maintaining a plan is worth it to preserve the opportunity to take a loan in the future.  Minimally, there is a cost to keeping a plan document current with regulatory and legislative changes.  There is a cost to filing 5500s.  There is a cost to deliver various recurring notifications.  There are administrative fees.  Is the opportunity to take a loan in future really worth the time, cost and effort?

All of this being said, a potentially simple answer may be to merge the plan into a Pooled Employer Plan.  The Pooled Plan Provider is the Plan Sponsor of the PEP, the PEP files the 5500 and sends out required notifications, and if the employer ceases to exist, the participants remain participants in the PEP.  To meet the objective of the owner, the PEP would have to allow loans to terminated participants, the account balances would have to be large enough to not be subject to cash-out rules, and the cost of administration must be tolerable.

These comments leave out important details about specific steps to take and potential compliance issues that cannot be known until the additional information is known, so please take these comments as food for thought.