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The Successor Plan Rule And Opening A New 401(k) Plan

We occasionally get asked, “Can I open a new 401(k) plan for my business after terminating a previous one?” Simple answer — Yes (we can show you how). While this is possible, there is one scenario when a business cannot open a new plan. 

Here’s what could prevent a plan sponsor from opening a new 401(k) plan.

Successor Plan Rule

As with all 401(k) plans, participants cannot take penalty-free withdrawals from their 401(k) until they reach the age of 59½. 

However, some people look for loopholes to exploit this, so to prevent such cases Congress created the successor plan rule. This rule prevents employers from terminating their 401(k) plan for the purpose of allowing participants to take penalty-free distributions before the age of 59½. 

As a result, a plan sponsor cannot establish a new 401(k) plan until 12 months have passed since the last distribution was taken from the last plan participant. Until this occurs, the plan is not considered terminated. 

Here’s an example of what this rule looks like:

ABCXYZ, LLC is terminating its 401(k) plan on March 31, 2020. All of the plan participants have withdrawn their money from the plan within the first 30 days with the exception of three participants. The last three participants will not withdraw their money until January 20, 2021. As a result, the earliest date that ABCXYZ, LLC can establish a new 401(k) plan is January 21, 2022.

For more information on 401(k) plan terminations, visit the IRS, or contact Saveday. We’ll work with you to get your plan set up in no time!

Photo by Ketut Subiyanto from Pexels.