substantial and recurring contributions

Recently the IRS has flagged one of our plans for this issue on audit. they want to take it into CAP and claim its a qualification issue. the only issue i see is that participants would need to be vested. if there is only one participant what is the real legal issue that could force the plan into CAP. seems a little harsh. anyone have any experience with this issue?

edit: noticed some earlier threads where they quote the IRS manual saying other than vesting there is no practical consequence though that section seems to have disappeared from the manual. 

Like you, I've seen plans where 100% vesting was required, but I've never seen them take the 1.401-1(b)(2) requirement to this extreme. Seems like a remarkably foolish thing - I'd bump it up to a supervisor. Don't know if anyone else has had this come up!

In the past were they more people in the plan.  If you read those rules carefully the full vesting goes back to when the plan first stopped making regular contributions.  So if you go back were there people paid less then 100% of their balance?  That retroactive look to this rule catches people at times. 

Other then that I got nothing coming to mind as to why one would need CAP. 

The plain rule has always been that plans are set up to be "permanent".  I've always considered the recurring and substantial contribution issue to be just that.  After you meet the standard (let's say 5 years of recurring and substantial contributions; and I say this loosely), then I don't see a challenge.  On the other hand, if an employer sets up a plan and never funds it, then that could be an issue.  The obvious work-around would be to set up a MPP with the formula of zero; letting the required funding of zero under the 'pension' feature trump the recurring and substantial rule.

Do you have more details about the actual plan they are challenging with respect to how long it's been in existence?

Good Luck!

"edit: noticed some earlier threads where they quote the IRS manual saying other than vesting there is no practical consequence though that section seems to have disappeared from the manual."

You may be referring to the information on "Complete Discontinuance" on pages 27 and 28 in the link below: "Facts and circumstances are used to determine if complete discontinuance has happened. If plan participants are fully vested at all times, then complete discontinuance is not an issue."

And with respect to EsopGuy's point: "In the case of a single employer plan, the discontinuance becomes effective not later than the last day of the employer’s taxable year following the taxable year in which the last substantial contribution was made."

https://www.irs.gov/pub/irs-tege/epchd604.pdf

3 hours ago, ETA Consulting LLC said:

The plain rule has always been that plans are set up to be "permanent".  I've always considered the recurring and substantial contribution issue to be just that.  After you meet the standard (let's say 5 years of recurring and substantial contributions; and I say this loosely), then I don't see a challenge.  On the other hand, if an employer sets up a plan and never funds it, then that could be an issue. 

Or if they set it up and fund it for one year.  "Substantial and recurring" could be used to establish permanence (or lack thereof, in which case they could indeed argue the plan was never qualified), or to establish an effective termination or partial termination, in which case the consequence is "only" full vesting.

Agree with ESOP Guy's point as to what the risk is, i.e. that when the period of no contributions started there were more participants and they left without full vesting. The vesting requirement goes back to when contributions stopped.

Start making some contributions, even 401(k) deferrals.

The concept of continuing qualification of "frozen" plans without the necessity of recurring contributions is widely recognized, it's even a "check box" in our PPA pre-approved plan document.

Sure, can have a completely frozen plan indefinitely, but then everyone must be 100% vested, at least in a DC plan. In a DB must be vested if freezing would cause a reversion, I believe.

Substitute "increase the likelihood of a reversion".

Right, Mike. And of course that rule was written long before the excise tax, when someone might have actually had something to gain by doing it!

I recall, in the dim and distant past, that the IRS had at least a potential issue if a profit sharing/401(k) plan was established solely for the purpose of rolling IRA money into it to take a participant loan. I know at the time, the solution was to establish a 0% Money Purchase plan. Or, to make at least token contributions now and then.

Has anyone heard anything further these days re the IRS opinion/stance on this issue, if any?