MEP situation - one of the more bizarre situations I've encountered

So, you have Plan A sponsored by Employer A. Employer B signs on as a participating employer, but not a CG/ASG and thus a MEP.

Plan B winds down to one employee. Plan B is supposed to spin off, and then immediately terminate plan. Plan B employer never signs the paperwork to do this, and in the meantime, the one employee terminates employment, and the distribution is processed by plan A, where the assets were held.

The question is, does the spinoff still need to happen, and a first and final 5500 form be filed for Plan B? There are no assets to spinoff, and the temptation is strong to just ignore it, but it feels all wrong.

Anyone ever encountered such a situation?

Consider some appropriate document, preferably in keeping with Plan A’s provisions about participating employers, to state that Employer B no longer is a participating employer after {date}.

Consider the next Form 5500 report and what boxes to uncheck and what items to remove or change so that as of the relevant period’s close Plan A no longer is a multiple-employer plan (absent any other participating employer treated as not the same employer as A).

This is not advice to anyone.

Thanks Peter.

There is no plan termination in this situation.  Remember, the plan will remain in effect, it just doesn't cover Employer B's employees.  This means that the one employee of Employer B is no longer eligible since Employer B no longer is covered employer.  As for a spin-off, Employer B is not adopting a new plan so there is no spin-off.  You should definitely document that Employer B is no longer a participating employer, which is analogous to a termination but is not an actual termination.  You would then need to process a distribution to the one employee given that Employer B's employees are no longer covered.  Peter's comment is 100% correct including his comment about the box for MEP on the 5500.

I agree with the need for documentation regarding the termination of Employer B's participation in the Plan.  However, I am not certain about the reporting... though I may be misunderstanding the comments regarding reporting.  It seems to me that Employer A would file the following: 

For the year of the distribution, the Plan's Form 5500 indicating under Part IA that the Plan was a MEP, including a Schedule MEP that provides information for both Employer A and Employer B in Part II 2a.  Note the 5500 is an annual disclosure form covering the PERIOD beginning ___ and ending ___.  It is not based solely on the last day of the year.  It seems to me no matter what day the distribution was made during that year, for at least one day in that year the Plan was a MEP.   Also, the Schedule MEP Part II specifically asks for the % of contributions made "for the year" by the participating employers.  So, it seems there would be information required to be disclosed for Employer B (though this may or may not be $0 depending on the facts).  The other column in the Schedule MEP Part II requests account balance info relevant to each participating employer but it seems that would be filled in with $0 since this information would be the Employer B balance determined "at the end of the year".   

Then, for the year after the distribution, the Plan's Form 5500 indicating under Part IA that the Plan is a single employer plan (and no Schedule MEP would be submitted).  The omission of the Schedule MEP in that following year would indicate to the IRS that the employer not listed in the Form 5500 single employer filing that was listed in the prior year Schedule MEP is no longer a participating employer.  (This seems to correlate to how the filing would be done if the Plan were still a MEP, i.e., the 5500 would be marked as being a MEP but no information concerning Employer B would be included on the Schedule MEP)).

I have not had to file a 5500 covering this type of situation before so I have not researched this and am just going off of what we have done when individual employers have  withdrawn from MEPs we handle.