No Contributions to your Profit Sharing/401(k) Plan for a While? Complete Discontinuance of Contributions and What You Need to Know
While plan sponsors aren’t required to make contributions to their profit sharing/401(k) plan every year, contributions must be “recurring and substantial” for a plan to be considered ongoing. Employee Plans Exam guidelines state that if the employer hasn’t made contributions in three of the past five consecutive years, the plan may have incurred a complete discontinuance of contributions.
When a complete discontinuance of contributions occurs, the plan sponsor must treat the plan as a terminated plan and fully vest all participant accounts for the plan to remain qualified. Determining if there’s been a complete discontinuance of contributions is based on facts and circumstances, for example, the plan sponsor’s history of profitability, and the probability of future contributions from the sponsor.
During its Complete Discontinuance of Contributions Project, the Employee Plans Compliance Unit (EPCU) looked at Forms 5500 and 5500-SF showing both:
- No contributions for the preceding five years (excluding 401(k) plans’ employee deferral contributions)
- To determine if a complete discontinuance of contributions occurred
- If there was a complete discontinuance of contributions, to ensure participants were correctly 100% vested
- To determine if plan participants were incorrectly identified as partially vested terminated participants on incorrectly prepared Forms 5500/5500-SF
The EPCU found plans that had experienced a complete discontinuance of contributions. Most of these employers did correctly 100% vest plan participants, but a few employers were unaware of this requirement. These employers corrected this vesting error for all affected participants through the Employee Plans Compliance Resolution System (EPCRS).
Additional findings included:
- Plan sponsors who incorrectly identified participants on the Form 5500 as terminated with less than 100% vesting. These plan sponsors filed an amended Form 5500.
- Cases in which facts and circumstances indicating the failure to make plan contributions didn’t rise to the level of a complete discontinuance. We informed plan sponsors of the law on complete discontinuance of contributions for future reference.
If you haven’t made contributions to your profit sharing plan for three of the past five years, consider the facts and circumstances to determine if a complete discontinuance of contributions has occurred:
- Your history of profitability/ability to make contributions.
- Whether you’ll be able to make contributions in the future.
If you’ve had a complete discontinuance and have made partially vested distributions, the plan’s qualification is at risk. You can fix this failure through EPCRS. Correction requires restoring previously forfeited accounts to affected participants, adjusted for lost earnings.
If your filed Form 5500/5500-SF incorrectly identifies partially vested terminated participants, fix the error promptly by filing an amended return.
If you have questions about this project, email us and include “Complete Discontinuance” in the subject line. Make sure you include your telephone number so we can contact you with answers. We’re sorry, we can’t answer technical questions unrelated to your compliance check. If you have account specific questions, see EP Customer Account Services.
We have many resources to help you keep your retirement plan in compliance. These resources can help you learn how to fix plan errors and avoid future ones.
- Fixing Common Plan Mistakes
- Fix-It Guides
- A Guide to Common Qualified Plan Requirements
- “Maintaining” Your Plan Video
- What You Should now About Your Retirement Plan (Department of Labor publication)