Safe Harbor and Profit-Sharing Contributions for Dissolved Company

Client is a dissolved company with 21 shareholders. Safe harbor and profit sharing contributions to 401k plan have not been made yet for 2025. Plan is terminated and all employees/shareholders have rolled over their account balances. The company has no money left. Currently working on reaching out to shareholders to make capital contributions, but many of the former shareholders have gone MIA. I thought of maybe having the termination undone, rescinding the safe harbor status of the plan and conduct testing, in order to get out of the company having to make over $300k in safe harbor contributions, but the recordkeeper confirmed that there are no assets remaining in the plan. Pretty sure you can't undo a termination if there are no assets. Any ideas are welcome.

If mtopalovic (or her employer) is a service provider, and not any fiduciary:

Have you been paid for all services already performed?

Might you decline to provide further services until they are paid in advance?

Might a suggestion that the corporation pursue shareholders for a contribution of capital be beyond your contract services?

If you assemble a draft of the plan’s administrator’s Form 5500 report on 2025, do it truthfully.

If you would be an electronic submitter of the administrator’s Form 5500 report, consider, after getting and considering your lawyer’s advice, withdrawing that service if the administrator instructs you to submit a report you believe would be false.

How will the plan’s administrator deliver to the plan’s participants, beneficiaries, and alternate payees the summary annual report that refers to the Form 5500 report on 2025?

Which person is responsible to tax-report distributions paid in 2026?

If contributions needed for 2025 safe-harbor treatment remain uncollected by October 15, 2026, has the plan lost 2025 safe-harbor treatment?

What steps could help you show that the service provider never had any discretionary authority, and never exercised any discretion?

This is not advice to anyone.

4 hours ago, mtopalovic said:

I thought of maybe having the termination undone, rescinding the safe harbor status of the plan and conduct testing, in order to get out of the company having to make over $300k in safe harbor contributions, but the recordkeeper confirmed that there are no assets remaining in the plan. Pretty sure you can't undo a termination if there are no assets.

My thoughts: Even though there are no assets in the trust, doesn't the plan have a receivable for the unfunded safe harbor contribution? Therefore, if the assets are not paid out in accordance with Rev. Rul. 89-87, then the plan is not terminated. So, even though you may not be "undoing" the termination through a board resolution, you do not have a valid termination if the benefits are not paid in a timely manner. 

18 hours ago, WCC said:

My thoughts: Even though there are no assets in the trust, doesn't the plan have a receivable for the unfunded safe harbor contribution? Therefore, if the assets are not paid out in accordance with Rev. Rul. 89-87, then the plan is not terminated. So, even though you may not be "undoing" the termination through a board resolution, you do not have a valid termination if the benefits are not paid in a timely manner. 

No receivable. The company decided that the safe harbor and profit sharing contributions were not going to be paid. I was brought to this client after all of this happened. I would have definitely told them at the outset that you can't just decide not to make safe harbor contributions.

I am thinking now about the IRS anti-cutback rules that would probably prevent the company from rescinding safe harbor status for safe harbor contributions that were already accrued.

In reality, they do have a receivable so a final 5500 should not be filed. If they do not make the required safe harbor by 12-31 (assuming 12-31 PYE), then the plan must be tested for ADP.    They should be directed to ERISA counsel as this is a plan disqualification issue.  Maybe address with them the 1099's being filed as taxable distributions rather than rollovers and the 6% annual excise tax for ineligible IRA deposits.   Also, DOL will pursue ERISA Fiduciary duty failure and will target named and De Facto Fiduciaries and collect the money via federal civil litigation most likely against all the former shareholders.  IRS can also go after them under IRC 6901 - if a corporation dissolves and distributes its corporate assets before paying it's debts.  I also believe filing for bankruptcy does not protect the shareholders.  This is a mess.  Wonder if any participants have questioned the lack of Safe Harbor to the DOL yet?

1 hour ago, David D said:

In reality, they do have a receivable so a final 5500 should not be filed. If they do not make the required safe harbor by 12-31 (assuming 12-31 PYE), then the plan must be tested for ADP.    They should be directed to ERISA counsel as this is a plan disqualification issue.  Maybe address with them the 1099's being filed as taxable distributions rather than rollovers and the 6% annual excise tax for ineligible IRA deposits.   Also, DOL will pursue ERISA Fiduciary duty failure and will target named and De Facto Fiduciaries and collect the money via federal civil litigation most likely against all the former shareholders.  IRS can also go after them under IRC 6901 - if a corporation dissolves and distributes its corporate assets before paying it's debts.  I also believe filing for bankruptcy does not protect the shareholders.  This is a mess.  Wonder if any participants have questioned the lack of Safe Harbor to the DOL yet?

They are not late yet on the safe harbor contributions, so there have been no communications from participants. It is just a matter at this point to find the funding for it. This was not handled properly by any means and I am trying to assist them in fixing this. The only solution I can see at this point is reaching out to the former shareholders requesting funding and explaining the legal ramifications for not doing so.

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Ha.  @Peter Gulia always asks the most important question first... Have you gotten paid?

Rev. Proc. 2021-30 §4.07 expressly permits VCP or Audit CAP correction for a terminated plan even when its trust no longer exists.  Thus, at least the IRS believes you can still have a plan even if no assets (my view is no trust = no assets).  If the employer has no resources, perhaps consider a VCP proposal documenting the insolvency and available recovery; but of course don't assume the IRS will waive funding.

From a DOL fiduciary standpoint, the unpaid employer contributions generally differ from withheld employee deferrals: the employer’s unpaid cash is not automatically a plan asset. However, the plan’s contractual right to collect contributions can be an asset. Did the responsible fiduciaries consider and preserve a claim to those contributions in bankruptcy, including any filing deadline and realistic recovery. Owners or committee members do not automatically become personally responsible merely because the company cannot pay; their conduct and the governing documents matter.

Yes, the uncorrected disqualification could affect prior distributions and rollovers. However, that is a potential consequence, and not up to you do determine that every rollover is already invalid. Distributions from a disqualified plan are not eligible rollover distributions—one reason to address qualification despite the empty trust.  However, it its the IRS that disqualifies the plan.  Here, the consequences though would really harm the participants.    

You should at a minimum coordinate with bankruptcy counsel...they and the court would have to guide you as far as VCP and recovery, etc. This is a definite CF.