What happens if not all assets out in 12 mos. DC Plan?

What happens if a plan has a termination date of 12/1/2018, but not all the assets have been distributed by 12/1/2019?

It's a DC plan.  401(k).

59 minutes ago, BG5150 said:

What happens if a plan has a termination date of 12/1/2018, but not all the assets have been distributed by 12/1/2019?

It's a DC plan.  401(k).

Happens ALL the time; you have 5500s required until there are zero assets.  For example, terminate a plan effective 12/31/18 (we never terminate 12/1, but you might have some unknown reason for doing so).  File with IRS for approval, maybe 4/1/19.  Wait for IRS approval which come 2/1/20.  Start distributions in 2020.  Hope that they all will be out by 12/31/20.  File 5500s for 2018, 2019, 2020 if all money is out by then. No big deal.

Similar question.  Dr. client has retired.  Straight PS plan.

One employee paid out in 2019, Dr. has a life insurance policy in the name of the plan.

He has rolled over the investment portion of the plan.

Must we wait until the life insurance ownership is changed to the Dr. as owner?

Or can file final 5500 for 2019?

The issue is whether the plan has in fact terminated.  IRS website provides that in a plan termination,  "All assets are distributed as soon as administratively feasible, generally within one year after the date of plan termination."  https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-termination

Right, but what happens if the assets aren't all paid out?  Is the accelerated vesting now bunk?  I understand the need to file 5500s, but are there any other concerns?

2 hours ago, thepensionmaven said:

Similar question.  Dr. client has retired.  Straight PS plan.

One employee paid out in 2019, Dr. has a life insurance policy in the name of the plan.

He has rolled over the investment portion of the plan.

Must we wait until the life insurance ownership is changed to the Dr. as owner?

Or can file final 5500 for 2019?

Yes; as long as there is an asset owned by the plan, you have "plan assets" that are required to be reported.  Changing the ownership should be one of the easiest things you have to do.

40 minutes ago, BG5150 said:

Right, but what happens if the assets aren't all paid out?  Is the accelerated vesting now bunk?  I understand the need to file 5500s, but are there any other concerns?

Go back to my original answer in this posting.  Accelerated vesting was required when you terminated the plan (adopted the amendment to terminate).  Not even sure what you mean by "accelerated vesting now bunk", but I think my answer covers it (whatever that means).  Is "bunk" an ERISA term??? ? 

Yes, changing the ownership should be, I'm just thinking if the insurance company does not within a reasonable time frame prior to 12/31.  But then again, the cash value of the life insurance has never been accounted for,

1 hour ago, Linda Wilkins said:

The issue is whether the plan has in fact terminated.  IRS website provides that in a plan termination,  "All assets are distributed as soon as administratively feasible, generally within one year after the date of plan termination."  https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-termination

Many plans go beyond one year.  One basic acceptable reason (but there are an infinite number of other acceptable reasons) is "waiting for IRS approval".

From the IRS page:

The IRS considers a 401(k) plan terminated only if:

• The date of termination is established (this can take the form of a plan amendment, board of directors’ resolution, or complete discontinuance of contributions);
• The benefits and liabilities under the plan are determined as of the date of plan termination; and
• All assets are distributed as soon as administratively feasible, generally within one year after the date of plan termination.

So, what happens after the 12 months and the IRS doesn't consider the plan terminated?  Did I prematurely vest some people to 100%?  Are there any adverse effects other than having to file 5500s and keep the plan up to date?

13 minutes ago, thepensionmaven said:

Yes, changing the ownership should be, I'm just thinking if the insurance company does not within a reasonable time frame prior to 12/31.  But then again, the cash value of the life insurance has never been accounted for,

Once the change of ownership form is signed and submitted, I believe the ownership has changed.  Doesn't matter how long it takes the insurance company to respond.  Of course, your second sentence is a problem all of its own....

So, what happens after the 12 months and the IRS doesn't consider the plan terminated?  Did I prematurely vest some people to 100%?  Are there any adverse effects other than having to file 5500s and keep the plan up to date?

You are missing the fact that the IRS will NOT consider the plan not terminated except in very dire situations. I think you are overworrying this issue.  Notice it says "generally within one year".  Many, many, MANY plans take more than one year with no problem.

It may be true that many, many plans take more than one year to liquidate, but the questions is, how many of those plans get audited, and what is the fate of those that do get audited? Recall that at one time everyone thought you could choose to disregard the DOL regulation saying deferrals need to be deposited "as soon as possible" and many, may employers chose to wait (for a good reason, for a bad reason, or for no reason at all) until the 15th day of the month following the date of the deferral until the plan was audited and the penalties were imposed, and the word got around that the DOL was saying that "as soon as possible" really does mean "as soon as possible" and that the stated event of the 15th day of the following month was, essentially, an unsafe harbor that was more or less the DOL's way of saying that any plan that waited that long to make a deposit was not depositing deferrals as soon as possible. The DOL has now provided a safe harbor period of seven business days as its way of saying "this period is presumed to be as soon as possible in today's world."

For a terminating plan, the one-year rule is in Revenue Ruling 89-87, and like the DOL's original guidance, the time period is characterized as an "outer limit" and not as a "safe harbor." Here's a small sample of the language in that Ruling:

"Whether a distribution [of all assets] is made as soon as administratively feasible is to be determined under all the facts and circumstances of the given case but, generally, a distribution [of all assets] which is not completed within one year following the date of plan termination specified by the employer will be presumed not to have been made as soon as administratively feasible."

The word "generally" doesn't say you "generally" have one year to distribute,  the word "generally" means you generally fail to satisfy the timeliness requirement if the process takes that long.  Whether or not you go past one year, the IRS can determine that you did not distribute assets as soon as administratively feasible and they can therefore nullify the plan's termination. If you go past one year, you will need to have very good documentation supporting facts and circumstances justifying a period in excess of one year because in that case the IRS starts negotiations with the proposition that you have presumptively failed to act timely. That is why I tell employers not to terminate a plan unless they are SURE they will (1) distribute all assets as soon as possible, and (2) be finished doing so within one year. If either proposition is uncertain, then they should wait to terminate until they are confident that they can meet both conditions.

If a termination is nullified, it is true that some plans might not have any adverse consequences, but, for example, consider that any distribution that was made from the plan SOLELY on account of plan termination is no longer a "good" distribution because the distributable event of "plan termination" has been deemed by the IRS as never having occurred. Another example is in the context of keeping a document up to date: While you get to ignore changes in law taking effect after the date of plan termination, that remains true only for so long as the date of plan termination continues to be recognized as such by the IRS, i.e., you satisfy RR 89-87. If upon audit the IRS determines that the plan's termination never occurred, then the plan might instantly acquire missing amendments and restatements that suddenly and retroactively pop-up because the plan has suddenly and retroactively become an ongoing plan. Any delinquent pop-up amendments or restatements must be dealt with under EPCRS.

Doc Ument, I think that if the "as soon as administratively feasible" slips beyond a year and the sponsor is making anywhere close to a reasonable effort to wind the plan up, the only consequence of not having all assets out within the year is that you have to file 5500's and also amend for law changes. I think it would take bad faith/willful disregard on the part of the taxpayer before IRS would say that prior distributions of the bulk of plan's assets (i.e., those that did not have special valuation or liquidity issues) were not "on account" of termination.

I agree with Luke and Larry---

I've terminated plans for 40 years and usually in the 80s and 90s we got this done well within the 1 year even with IRS approval---now 

it's much different. The key to me is  a paper trail of reasonable good faith steps to get it done in a timely manner that is well-documented.

20 hours ago, Doc Ument said:

It may be true that many, many plans take more than one year to liquidate, but the questions is, how many of those plans get audited, and what is the fate of those that do get audited? 

In over 40 years of doing this, we have had those plans audited and it was NEVER an issue.  NEVER.

Recall that at one time everyone thought you could choose to disregard the DOL regulation saying deferrals need to be deposited "as soon as possible"

Well, we NEVER thought you could choose to disregard those regs. NEVER.

 and many, may employers chose to wait (for a good reason, for a bad reason, or for no reason at all) until the 15th day of the month following the date of the deferral until the plan was audited and the penalties were imposed, and the word got around that the DOL was saying that "as soon as possible" really does mean "as soon as possible" and that the stated event of the 15th day of the following month was, essentially, an unsafe harbor that was more or less the DOL's way of saying that any plan that waited that long to make a deposit was not depositing deferrals as soon as possible. The DOL has now provided a safe harbor period of seven business days as its way of saying "this period is presumed to be as soon as possible in today's world."

For a terminating plan, the one-year rule is in Revenue Ruling 89-87, and like the DOL's original guidance, the time period is characterized as an "outer limit" and not as a "safe harbor." 

No one is saying it is a safe harbor.

Here's a small sample of the language in that Ruling:

"Whether a distribution [of all assets] is made as soon as administratively feasible is to be determined under all the facts and circumstances of the given case but, generally, a distribution [of all assets] which is not completed within one year following the date of plan termination specified by the employer will be presumed not to have been made as soon as administratively feasible."

The "presumption" is EASILY rebuttable and we have NEVER had an issue with that. NEVER.

The word "generally" doesn't say you "generally" have one year to distribute,  the word "generally" means you generally fail to satisfy the timeliness requirement if the process takes that long. 

That's not what it says. What it is saying is that if you go beyond the year, you are going to have to have a "good" reason. As it turns out, almost any reason at all has been acceptable.

Whether or not you go past one year, the IRS can determine that you did not distribute assets as soon as administratively feasible and they can therefore nullify the plan's termination. If you go past one year, you will need to have very good documentation supporting facts and circumstances justifying a period in excess of one year because in that case the IRS starts negotiations with the proposition that you have presumptively failed to act timely.

You are overstating the concern; it is a simple conversation: "Why did it take so long?  Because of this....".  And then it is on to the next item.  Again, in 40 plus years, never an issue.

That is why I tell employers not to terminate a plan unless they are SURE they will (1) distribute all assets as soon as possible, and (2) be finished doing so within one year. If either proposition is uncertain, then they should wait to terminate until they are confident that they can meet both conditions.

Sorry, but that is just not necessary.  Waiting to terminate when a plan should be terminated is much more of a problem than explaining why it took over a year.

If a termination is nullified, it is true that some plans might not have any adverse consequences, but, for example, consider that any distribution that was made from the plan SOLELY on account of plan termination is no longer a "good" distribution because the distributable event of "plan termination" has been deemed by the IRS as never having occurred. 

Have you actually ever had a plan experience a nullification?  I've probably terminated over 1000 plans over the year and never have.  Is your experience different?  Tell us the specifics if it is.

Another example is in the context of keeping a document up to date: While you get to ignore changes in law taking effect after the date of plan termination, that remains true only for so long as the date of plan termination continues to be recognized as such by the IRS, i.e., you satisfy RR 89-87. If upon audit the IRS determines that the plan's termination never occurred, then the plan might instantly acquire missing amendments and restatements that suddenly and retroactively pop-up because the plan has suddenly and retroactively become an ongoing plan. Any delinquent pop-up amendments or restatements must be dealt with under EPCRS.

Yes, IF you so royally screw up, that could be the result.  But in the normal course of event, it just doesn't occur.

I am not trying to invalidate anyone’s experience or challenge anyone's beliefs.I appreciate becoming better informed that in your collective experience this rule generally is not a big deal. However, not long ago, I asked a nationally known consultant if he was aware of plans having been disqualified on account of distributions made on account of plan termination prior to a plan termination having been nullified pursuant to RR 89-87, and the response was “absolutely yes." I have not personally witnessed a plan disqualification because I do not assist with the termination process, I merely give general overviews of the process. When I am asked about this rule, I provide the words in the Ruling and urge the employer to seek counsel if there is any doubt as to the process and its timing.

A true one-year safe harbor provision in the context of distributing assets would not say what that Ruling says, the Ruling would say instead that a complete distribution of assets within one year will be deemed to satisfy the facts-and-circumstances evaluation.

If the word on the stop sign is “stop,” and you are going 1mph, you can get a ticket. I know because I got  a ticket, as well as "points" on my license and a moving violation on my insurance. I still remember that event when I catch myself rolling through a stop sign decades later.

Perhaps most practitioners have not had problems because they have provided good advice throughout the termination process, whereas employers in riskier situations and without good advice would have survived the termination audit had the employer abided by the letter of that Ruling. My only point is that it seems to me that the IRS absolutely has the ammunition available to cause pain if it finds that the employer has held on to the money for a reason that fails the IRS smell test. I see no purpose in the IRS including a "one-year" provision in that Ruling except to suggest that the IRS standard of review changes at that point, i.e., the IRS will become more reluctant to give employers the benefit of a doubt when evaluating the facts and circumstances. Pretend that 10 years have passed since the date of plan termination, the owner still has their money in the plan while everyone else has been paid out, and there has been no maintenance on the plan document during that period. Problem?

40 minutes ago, Doc Ument said:

 Pretend that 10 years have passed since the date of plan termination, the owner still has their money in the plan while everyone else has been paid out, and there has been no maintenance on the plan document during that period. Problem?

 

Yes, that is a problem.

But no one here is defending that fact pattern.  No. and I mean NO ONE is saying ignore the rule.  They are saying there is a presumption that if it takes over a year it is a problem unless you can rebut the presumption with good reason(s).   That fact pattern is not even trying to have a good reason. 

To use example from another place you have a presumption that can be rebutted. 

I have a bunch of ESOP clients that are staffing firms and convenience stores.  Every year, and I mean EVERY year, their turnover is greater than 20%.  A number of them have been audited by the IRS over the decades.  In each case we have a conversation if the Partial Termination has happened.   We have won that there wasn't a Partial Termination every time.  The 20% rule is a presumption there was a Partial Termination unless you can rebut it.  We can show their turnover is an industry norm.  We win once we show that is true.  

In both of these cases the rule is there and no one is saying ignore it.  We are saying make sure you have the documents to rebut the presumption.   In the case of plan terminations experience tells us if you can show just about any fact set that comes across as reasonable you will rebut the presumption.  

Another story but I have an ESOP that is going on its 4th year in the termination process.   The plan terminated in 2016 and we will most likely get the assets fully paid in 2020.  We have had multiple partial payments as the funds were available.  It turned out one of the money market funds they had invested in was subject to embezzlement.   It has taken until last month for the final court rulings on what can and can't be paid from that money market fund.   We paid all most all the assets the plan had access to within the 1st year.  Now we will pay the last of the assets when released by the court.  Taking 4 years is a very long time but it was reasonable and I am confident we could rebut the presumption of the 1 year rule.  

Thank you all. Per a number of your suggestions, I will revise my advice (to people asking about the termination process) to include a statement to the effect that practitioners who terminate many plans believe that the standard stated by the Revenue Ruling is generally of concern only when there has been a delay in distributing all assets that is in "bad faith." ...Meaning, that a reasonable attempt to comply with the Ruling generally suffices. Having said that, if an advisor discovers that their new takeover plan still has assets in the trust fund despite the plan having terminated a year ago, I think it would be prudent to make sure that the presence of such assets is not the result of the employer not yet having taken any action in preparation for the distribution of assets, and, where that is the case, the advisor should make it clear that the employer needs to start taking decisive actions in getting assets out of the plan in order to demonstrate good faith compliance. On the other hand, if the actions taken by the employer or previous advisor to date have been at least as "fast" as would be "typical for the industry, then the "one year" rule should not be a cause for anxiety.

14 hours ago, Doc Ument said:

if an advisor discovers that their new takeover plan still has assets in the trust fund despite the plan having terminated a year ago

Why would a "new takeover plan" have been terminated?  Inquiring minds...

I would assume a "takeover" of investments?

1 hour ago, thepensionmaven said:

I would assume a "takeover" of investments?

Then why would the existence of investments be a discovery?

I fail to see the relevance of how it came to pass that a particular plan was assigned to my in-box. Maybe I agreed to take over a group of plans from another practitioner and there is a terminated plan within that group (whether or not I realize that at the time I agree)? Or, perhaps, I know this employer, and the employer is unhappy with the speed at which their current advisor or recordkeeper is progressing with the distribution of all assets, and prefers that I take over that process. Or, perhaps I am the new partner, and I am taking a spot check of an associate's work, and ask to have that particular account assigned to me, and it happens to be a plan with assets in it and a terminate date of one year ago. 

This was an off-the-cuff example in what was intended to be an informal and nice acknowledgement of some criticism that I earned, entered at the end of a long day.

I decline to engage in this topic any further, so if I've left any loose ends open that defy reality, so be it. Thanks to all of you who responded on the subject matter of this thread.