"Partial" plan termination

We have a PSP wherein the employer has not made a contribution since 2013, has the investment broker send duplicate statements for one account, but there are several.  I will not belabor this point here, as that is not my question.

I know what a partial plan termination is, but as of when is this determined? From 2-3 years from the last contribution, which would make all participants 100% vested?

Which would mean anyone receiving a distribution from, let's say 2015 forward must be 100% vested?

For 2018, the account is telling us he will be making a contribution, which obviously would include any individual with a W-2 who is still "in" the plan plus any individual meeting eligibility of 21/12/1,000 hours.

I don't think a partial termination is the issue. It revolves around the determination of whether the IRS considers the plan "terminated"  - and therefore 100% vesting - due to a "complete discontinuance" of contributions. Perhaps others here have had more experience with this - and it is somewhat of a facts and circumstances determination. My (limited) experience has generally been that 5 years would be a complete discontinuance. See 1.411(d)-2(d)(2) for information on when a complete discontinuance becomes effective.

Note that if there were 401(k) deferrals, you should be able to count this as an "employer" contribution for these purposes, although I'm not sure that is ironclad.

I think the IRS may determine a complete discontinuance takes place earlier than the 5-year mark in some situations. Again, others may be able to give you an answer based upon more actual experience.

The term you want to look for is discontinuance.  It's defined in 1.411(d)-2(d). Here is a page on the IRS website dealing with it.

https://www.irs.gov/retirement-plans/no-contributions-to-your-profit-sharing-401-k-plan-for-a-while-complete-discontinuance-of-contributions-and-what-you-need-to-know

In most cases, if there hasn't been a contribution to the PS plan in 3 of the last 5 years, the IRS is going to say there has been a discontinuance, although a lack profits may affect the determination (Rev. Ruling 80-146).

 The timing of the discontinuance ends up being retroactive and is described in 1.411(d)-2(d)(2):

Quote

(2) Time of discontinuance. In any case in which a suspension of a profit-sharing plan maintained by a single employer is considered a discontinuance, the discontinuance becomes effective not later than the last day of the taxable year of the employer following the last taxable year of such employer for which a substantial contribution was made under the profit-sharing plan. In the case of a profit-sharing plan maintained by more than one employer, the discontinuance becomes effective not later than the last day of the plan year following the plan year within which any employer made a substantial contribution under the plan.

So, if the plan year and employer's tax year are both calendar years and the last contribution made was for 2013, the discontinuance would occur at 12/31/14. GCM 39310 says that partially vested participants who terminate and receive a distribution of their vested balances need not be further vested if the plan terminates before they incur a break in service. Basically, everyone with a balance at 12/31/14 becomes fully vested. Since you didn't know that at the time because all of the conditions for a discontinuance hadn't happened until the due date for the 2016 contribution, there were probably some partially vested people paid based on the wrong vesting.  That needs to be corrected using EPCRS. If the forfeitures are substantial, the reallocation correction method may be helpful.

Client wants to make a contribution for 2018.  I would think IRS, in considering the plan "terminated" would disallow a deduction on the grounds that the client has not made a recurring contribution for more than several years; and all of a sudden decides he has ti make it as his accountant told him he needs the deduction.

Just doesn't pass the old "smell test" to me.

13 hours ago, thepensionmaven said:

Client wants to make a contribution for 2018.  I would think IRS, in considering the plan "terminated" would disallow a deduction on the grounds that the client has not made a recurring contribution for more than several years; and all of a sudden decides he has ti make it as his accountant told him he needs the deduction.

Just doesn't pass the old "smell test" to me.

I don't think the issue is true "termination" with an inability to make future contributions (and presumably some kind of wind-down of the plan with distributions due to "termination"); it is all about vesting.  Not that an IRA discussion on the web is definitive, but you might want to check out their page specifically on this issue; nothing at all about anything but vesting:  

No Contributions to your Profit Sharing/401(k) Plan for a While? Complete Discontinuance of Contributions and What You Need to Know

A complete discontinuance of contributions is not a partial plan termination or a plan termination.  The language is essentially the same in 411(d)(3) and 1.411(d)-2(a).  Both places list three separate situations where 100% vesting is required.  100% vesting is required upon a 1) plan termination, 2) partial plan termination, or 3) for a plan not subject to section 412, a complete discontinuance of contributions under the plan occurs. 

Quote

1.411(d)-2(a) General rule—(1) Required nonforfeitability. A plan is not a qualified plan (and a trust forming a part of such plan is not a qualified trust) unless the plan provides that—

(i) Upon the termination or partial termination of the plan, or

(ii) In addition, in the case of a plan to which section 412 (relating to minimum funding standards) does not apply, upon the complete discontinuance of contributions under the plan,

the rights of each affected employee to benefits accrued to the date of such termination or partial termination (or, in the case of a plan to which section 412 does not apply, discontinuance), to the extent funded, or the rights of each employee to the amounts credited to his account at such time, are nonforfeitable (within the meaning of §1.411(a)-4. 

Thanks, I mentioned 100% vesting a few years ago, and will remind him again.