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ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring the Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Connecticut is representative of a common inquiry related to plan terminations. The advisor asked:
“My client started the process of terminating her 401(k) safe harbor plan, but has not distributed plan assets yet. She has changed her mind and wants to keep the plan going. Can she stop the termination process?”
Yes, generally, it is possible to stop the process of terminating a retirement plan so long as plan assets have not been distributed. Your client should seek guidance from an ERISA attorney and/or tax advisor during this process for guidance based on her particular needs.
The IRS states, “A qualified retirement plan that has not distributed its assets is considered an ongoing plan and must continue to meet the qualification requirements, including amending the plan document for law changes.”
The first item to address when un-terminating a plan is to understand if there was a board of directors’ resolution to terminate the plan. If so, the board will need to execute another resolution to rescind the resolution to terminate the plan. Also, any executed plan amendments to terminate the plan would have to be reversed with a subsequent amendment to reinstate the plan.
If the plan has stopped salary deferrals, a “missed deferral opportunity” exists that will need to be corrected. Based on the correction methods outlined in Rev. Proc. 2021-30, if the decision to rescind the plan termination and restart deferrals occurs within a 90-day window, then a qualified nonelective contribution will not be required. A special notice will need to be provided within 45 days for affected employees. Also, if applicable, any mismatched contributions will need to be reconciled.
If the decision to rescind the plan termination and restart deferrals occurs after a 90-day period, then a corrective qualified nonelective contribution will be due to the affected participants in addition to the special notice and any missed matching contributions.
When a plan termination is rescinded, there could be an issue related to vesting and employer contributions. If prior notice to employees advised participants they would become 100 percent vested in employer contributions as a result of the plan termination, this may not be able to be reversed. Consequently, affected participants would accrue the right to full vesting of current and future employer contributions.
The reasons for and all actions taken to rescind a plan termination should be documented and retained by the plan sponsor.
The correction process outlined above addresses several, but not all, items involved in rescinding a plan termination. It is advisable to consult with an ERISA attorney and/or tax advisor during this process for particular needs. To listen to this case on YouTube, click here.