Participating employer withdraws from the PEP

A participating employer has chosen withdraw from participation of the PEP and terminate their plan.  The employees with cease contribution and their assets will be moved to their own SEP plan.  The SEP plan will be terminating immediately.  

Question:  How is final testing completed?  From the PEP or from the SEP?  Short Plan year?  

Any thoughts would be appreciated.

not answering your question - but why move to the SEP? does the PEP not allow outright terminations for an employer?

Yea the SEP part of the question doesn't make sense OP, can you expand on that?

Generally speaking, ceasing participation in a MEP/PEP is not a distributable event.  A participating Employer / Adopting Employer cannot terminate the MEP/PEP, or their portion of the MEP/PEP.   You can spin off your portion of the MEP/PEP though.

Your starting point should be to speak with the MEP/PEP provider.  They should have information for you.

Correct the withdrawal from participation is not a distributable event.  The employer will transfer the plan assets to a "newly" established SEP plan as a successor plan but will not have any future contributions.   The SEP plan will then terminate which becomes the distributable event.   

With this, where is the 2026 contributions tested?  Under the MEP or the SEP?

I agree that it's not a distributable event. I don't think you can have an employer initiated transfer to a SEP (which are IRAs). I think you must create a new qualified plan for the plan-to-plan transfer and then terminate that plan. Which may make it easier to answer your question. The new plan would perform testing and make any corrections.  

Sorry for the confusion...for SEP that references Single Employer Plan.  So, yes plan to plan transfer. 

36 minutes ago, justatester said:

Sorry for the confusion...for SEP that references Single Employer Plan.  So, yes plan to plan transfer. 

 

Ah that makes more sense.  The answer to your question on final testing is... It depends.  From your description, the spun off plan will not accept ongoing contributions, it is created just to facilitate the distribution of assets.  I would structure the spinoff documentation in such a way that the "new plan" terminates on inception, there is no activity other than the transfer in and distributions.  Final testing would happen in the PEP, transfer assets to the spin off plan, and finally distribute the assets.  For 5500 purposes, the PEP reports the transfer out, and the spin off plan reports the distributions.