Can we reinstate a terminated plan?

Client sponsored a 401k plan and terminated that plan a couple of years ago for various reasons.

All participants were properly fully vested and received a complete distribution - with the exception of one.

There is one remaining participant that still has plan assets in a brokerage account that have not yet been paid out.

Their business situation has changed and they would like to start a new plan.

However, even though this plan was terminated, it still exists and they continue to file Form 5500. 

What are their options?  If they finally get this participant paid out, typically they cannot start a new plan for at least 12 months.  Is there any possibility of reinstating the existing plan since it has not yet been fully paid out and a final Form 5500 has not yet been filed?

I think you may be able to reinstate (I would say unfreeze the plan).  One of the requirements of a plan termination is that the plan must distribute all assets within a reasonable time.  I believe a reasonable time is within 12 months.  There were still assets a couple years later.  I think you could make an argument that the plan is now frozen instead of terminated.  The Forms 5500 have continued to be filed which is good.  Often, you'll see where the Forms 5500 have not been filed with one remaining participant hanging on over a couple of years. I'm not sure if just a resolution to terminate was adopted or both a resolution and amendment.  You may want to address that.

If you take the position that the plan was never terminated in the first place, what are the implications with respect to the distributions made to active employees (if any) at the time it was thought to be "terminated"? 

There are several discussions about unterminating a plan before commencing distributions.  I don't think you can put the toothpaste back in the tube once you start paying out participants.  Their option would be to pay out the remaining participant ASAP and start a plan 12 months thereafter.  Or look at options that do not trigger successor plan rules such as ESOPs, DBs, SEPs, SIMPLEs, 403(b)s, 457(b)s.

So are you saying the reason you can't put the toothpaste back in the tube is that it's too messy or because it's dried up because the cap was left off for too long? 

If a plan sponsor takes actions to terminate a plan but doesn’t distribute the assets as soon as administratively feasible, the plan isn’t considered terminated under IRC 401(a), so you have an ongoing qualified plan. The problem is with the distributions as was noted upthread by another poster.  How do you undistribute assets when you retroactively take away the distributable event?

You can't.(?)

EPCRS has correction methods for overpayments.  The overpayment references are scattered around Rev. Proc. 2016-51, but most refer you to Section 6.06(4) for DC plans.  Note the exception to the make-whole contribution for payments made in absence of a distributable event, but otherwise determined in accordance with the terms of the plan.  You said it started a couple of years ago, so they may or may not be eligible for SCP.  Even if they are eligible for SCP, this would probably be a good one to submit under VCP to get IRS approval. 

Quote

(4) Correction of Overpayment (defined contribution plans and 403(b) Plans). (a) In general. An Overpayment from a defined contribution plan or 403(b) Plan is corrected in accordance with the Return of Overpayment method set forth in this section 6.06(4). Under this method, the employer takes reasonable steps to have the Overpayment, adjusted for Earnings at the plan's earnings rate from the date of the distribution to the date of the correction of the Overpayment.

(b) Make-whole contribution. To the extent the amount of an Overpayment adjusted for Earnings at the plan's earnings rate is not repaid to the plan, the employer or another person must contribute the difference to the plan. The preceding sentence does not apply when the failure arose solely because a payment was made from the plan to a participant or beneficiary in the absence of a distributable event (but was otherwise determined in accordance with the terms of the plan (for example, an impermissible in-service distribution)).

(c) Unallocated account. Except as provided in section 6.06(4)(d), a corrected Overpayment, adjusted for Earnings at the plan's earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.06(2), to be used to reduce employer contributions (other than elective deferrals) in the current year and succeeding year(s) (or, if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan's allocation formula).

( d) Repayment by the participant or beneficiary. To the extent an Overpayment was solely considered a distribution in the absence of a distributable event but was otherwise determined in accordance with the terms of the plan, any amount returned to the plan by the participant or beneficiary is to be allocated to his or her account.

(e) Notification of employee. Except as provided in section 6.02(5)(c) with respect to the recovery of small overpayments, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under §  402(c)(8)(B) (and, specifically, was not eligible for tax-free rollover).

(f) Other correction methods. Other appropriate correction methods may be used to correct Overpayment failures from a defined contribution plan. Depending on the nature of the Overpayment, an appropriate correction method may include using rules similar to the correction method in section 6.06(4)(a) but having the employer or another person contribute the amount of the Overpayment (with appropriate interest) to the plan instead of seeking recoupment from a plan participant or beneficiary. Another example of an appropriate correction method includes a Plan Sponsor adopting a retroactive amendment to conform the plan document to the plan's operations (subject to the requirements of section 4.05). Any other correction method used must satisfy the correction principles of section 6.02 and any other applicable rules of this revenue procedure.

At the risk of stating the obvious, a plan that has the toothpaste out of the tube has more *potential* problems then having made distributions upon plan termination if such termination is nullified.  For example, pretend that on the fictitious date of plan termination of 12/31/16, a calendar-year plan was up-to-date with all qualification requirements, but that a new law took effect on 1/1/17 with a required plan amendment required by the end of the first plan year beginning in 2017.    A plan that timely distributes ALL plan assets as soon as administratively feasible (which I will refer to as "ASAP") will need no such amendment, i.e., the 12/31/16 date of termination will continue to "hold."   Thus, the employer does not adopt that amendment in 2017.  However, if either the employer or the IRS nullifies the termination date of 12/31/16, let's say in 2018, the plan can be retroactively disqualified not only because of any distributions that were made solely on account of plan termination in 2017, but also because my imaginary amendment was not timely adopted in 2017.   In the case of an IRS nullification, I suspect that it may be too late for EPCRS.

The employer (or advisor) must look for ALL the potential disqualification defects that might result from trying to put the toothpaste back into the tube.   I am not suggesting there are always other reasons for plan disqualification, only that no voluntary decision to rescind a termination should be undertaken casually, especially one that is made "a couple years later."

And on that point, Revenue Ruling 89-87, much like the DOL deferral-deposit rule, does not have a safe harbor period of time during which it is "safe" to delay making distributions (or deposits, in the case of deferrals).   I think we agree that the DOL generally requires that if deferrals can be deposited by an employer in 10 days, then that the enforceable deadline is 10 days, not the proverbial middle of the following month.   Similarly, if the IRS believes that all plan assets could easily have been distributed within one month, then a plan termination can be nullified by the IRS (and, in any event, is likely to be asserted) if distributions are not made within one month (see 2017 examination guideline excerpt below).

The one-year period provided in Revenue Ruling 89-87 is worded such that if any assets remain in the trust after one year, the IRS will presume that assets were not timely distributed.  However, no presumption (safe harbor) is made by that Ruling that suggests that assets that are distributed within one year have (in fact) been distributed ASAP.   I interpret that Ruling as saying to employers that it would be best to not terminate a plan as of a particular date unless the employer believes that on that date of termination that (1) all plan assets can be and will be distributed ASAP after that date, and (2) there is no reason to believe (on the date of plan termination) that doing so will take more than one year.

I believe all the above points were more succinctly stated in the 2017 IRS examination guidelines (which is the current IRS interpretation of the stated Ruling) as follows:

"If a plan sponsor takes actions to terminate a plan but doesn’t distribute the assets as soon as administratively feasible, the plan isn’t considered terminated under IRC 401(a). The plan must remain qualified until it’s terminated. See Rev. Rul. 89-87 and IRM 7.12.1.8 , Wasting Trust Procedures."