Start new 401(k) within 12 months of terminating PSP?

Company terminated PSP recently and wishes to put in a new 401(k) Plan in its stead. Does the 12-month rule apply to terminated PSPs in the same way that it applies to 401k Plans? That is, are they allowed to setup a 401k within 12 months of terminating a PSP?

There is always confusion about the successor plan rule - the prohibition isn't that a business can't have another plan within 12 months. 

It's that if there is a successor plan the participants in the first plan did not have a distributable event due to plan termination, and unless they had another event (employment termination, age etc) they should have NOT been allowed to take the money, and it must go to the successor plan. 

Maybe this isn't a big deal if the money in the PSP hasn't yet been paid out. 

Now, as to the question if there is a successor plan - my gut says yes, as both are plans under 401(a), and a 401(k) plan is actually a PSP with a COPA provision, but for short is just called a 401(k) plan. It's a profit sharing plan with a 401(k) provision. 

Is the new plan going to be deferral only and not allow for employer contributions? If so , then yes, I would think for sure it would be a successor plan. 

Also, did it know it wanted the 401(k) plan when it terminated the PSP? Seems odd to want a new plan so quickly. Would it have been simpler to update the PSP to add a 401(k) feature? 

This is NOT my area of knowledge but I really thought the successor plan rules ONLY applied to 401(k) plans.  Yes, all 4k plans are PSP plans but not all PSP plans are 4k plans.  

The law regarding this is found in IRC 401(k)(10)(A) .

I am thinking (but happy to be told I am wrong) that applies only to a PSP that has 401(k) provisions.  

Hmm 

10(A) In general - An event described in this subparagaph is the termination of the plan without establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7))."

How curious. So if a 401(k) plan terminates and then a PSP is started, the PSP could be a successor plan, but if a PSP terminates, and a 401(k) plan is started, it wouldn't be?

one of the distribution rules that apply to 401(k) plans is no distributions before age 59 1/2. (hardship is an exception)

therefore, you can't cheat by terminating a 401(k) plan, and say "I can distribute because the plan is terminated" and take a distribution and then start a new plan (there are a few exceptions) within a year.

in this case, a ps was terminated. there is no such 'no distribution before 59 1/2 rule', so there is no successor plan rule that applies because you aren't trying to get around the distribution rule.

see also

http://www.julyservices.com/documents/Newsletter/TexP_2004Issue4_v3.pdf

14 hours ago, justanotheradmin said:

 Also, did it know it wanted the 401(k) plan when it terminated the PSP? Seems odd to want a new plan so quickly. Would it have been simpler to update the PSP to add a 401(k) feature? 

As tends to be the case, the facts are coming out slowly. The resolution to terminate the PSP was adopted in 2017. They believed it was terminated due to the adoption but there are still assets in the PSP Plan, which - they did not understand - must be distributed to terminate the Plan. 

The successor plan rules are found in the 401(k) regulations and are only an issue if the terminating plan had a 401k feature.  In this case, the terminating plan was a profit sharing plan only, so no successor plan rule applies.  The PS plan can be terminated and then a 401k plan started immediately.

Also, just for reference, the 12-months starts "ticking" after all assets have been distributed.  Distribution from a 401k plan may not be made if the employer establishes another plan within 12 months after all assets are distributed.  

On 5/9/2019 at 9:07 AM, 401king said:

As tends to be the case, the facts are coming out slowly. The resolution to terminate the PSP was adopted in 2017. They believed it was terminated due to the adoption but there are still assets in the PSP Plan, which - they did not understand - must be distributed to terminate the Plan. 

If their intent was simply to stop making contributions to the old plan and start a new one, they could consider simply merging the old one into the new one.  As Tom Poje says, it is possible to terminate a PS plan without 401(k) features, without worrying about a successor plan.  However, merging the plans would avoid the administrative issues of either terminating the old plan or maintaining two plans.