Company A, which maintains a 401(k) plan, merged with Company B, which also maintains a 401(k) plan. After the merger, employees of Company B became eligible to participate in Company A's plan. Several months later, the Company B Plan was "terminated" (although it does not appear that any formal company action was taken to terminate the plan) and distributions were made to all participants. Of course, distirbutions upon termination were not permitted under Code Section 401(k)(10) because the Company A Plan is a successor plan. All but one participant elected direct rollovers to the Company A Plan. The remaining participant rolled into an IRA. A final Form 5500 was filed for the Company B plan.

I would view the distributions as an operational failure that should be corrected through EPCRS. The appropriate correction would seem to be to return the improper distributions to the plan
(with possible adjustment for earnings/losses). The failure is certainly significant, but would be within the correction period for the Self Correction Program. I would think an amended 5500 should also be filed.

Anyone ever handle a similar situation or have any thoughts on how best to correct the distribution failure?

Thanks.

I would sure try and recharacterize it as a merger of the plans (which is what should have been done originally) by amending the receiving plan to address the merger and treating the one non-rollover contribution as an improper distribution. I don't know what the 5500 reporting is for a plan that is merged into another, but I guess that a final 5500 has to be filed for that as well. Otherwise, you are going to wind up with two 401(k) plans that have to be merged in the future anyway.