Q can a 401k plan be amended into an esop a yes this

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Q: Can a 401(k) plan be amended into an ESOP? A: Yes, this is fine because they are both defined contribution plans. Q: Can a straight DB plan be amended into a cash balance plan? A: Yes, this is fine because they are both defined benefit plans. Q: Can a straight DB plan be amended into a money purchase pension plan? A: No, while an MPPP is a pension-type plan it is not a DB plan. You cannot amend a DB plan into a DC plan. You must first terminate the one and then install the second. Q: Can a 401(k) plan be amended into an IRA? A: No. This is actually a trick question because an IRA is not an employer-sponsored plan. It is neither a DB nor a DC plan. You can rollover a 401(k) into an IRA, but this requires that the participant has terminated employment with the plan sponsor first. Limits on Plan Termination The IRS monitors all terminations to make sure that the plan sponsor was not creating a temporary tax shelter rather than a long-term retirement savings vehicle . In particular, the IRS gives great scrutiny to any plan that is terminated within 10 years of its installation. If the plan is deemed a temporary tax shelter , then the IRS will disqualify the plan and the retroactive tax nightmare will commence. This
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nightmare involves all contributions being deemed not tax deductible for both the sponsor and the participants. This could potentially create a waterfall of tax issues for employer and employee alike. What if business conditions change in the first 10 years and the company simply has no choice but to terminate its plan? If an employer can show that the termination is the result of a legitimate change in business conditions that is beyond their control, then the IRS will often not disqualify the plan. This is more common with smaller employers as opposed to larger, more established firms. Would a defined contribution plan ever terminate due to insufficient funding? In an extreme case, they could. The employer might not have enough money to make the current year's contributions and hence the motivation either to freeze or to terminate their plan. It is possible, but freezing is less common with DC plans. Would a defined benefit plan ever terminate due to insufficient funds? The answer to this question is a resounding yes! Defined benefit plans most often terminate due to insufficient funds. When the plan assets dip too low (due to missed contributions in the past or poor market performance) the plan’s temptation to freeze or terminate becomes substantial. It is important to note that a plan cannot use a plan termination to avoid a compliance issue. When a plan goes through the formal termination process, the IRS will look extremely closely at any possible regulatory infraction. The employer will be held financially responsible if one is found.
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  • Spring '14
  • VOSS,JAMESA
  • Cash balance plan

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