There are several occasions when business owners consider terminating their retirement plan. 

• Business slowdown
• Acquisition of the company
• Lack of participation by the employees
• Testing problems
• Increased expenses/contributions
• Time spent managing the Plan

These are just some of the things we have heard from business owners over the years.  But terminating a Plan is a drastic step!  Take a couple of minutes to consider some of the alternatives outlined here that may prove to be easier and less expensive than moving forward with terminating your retirement plan.

CONSIDERATIONS

Terminating a retirement plan is time consuming.  There’s an old saying that plans are a little like marriages – they’re easy to get into, and hard to unwind! 

Here is a list of some things that may surprise you when you start to terminate a retirement plan

• Vesting becomes 100% for all participants.  Even if an employee left years ago, if they hadn’t forfeited their unvested balance on the day when the Plan is discontinued, they will become 100% vested in their account balances.
• Distributions must be processed to everyone who has money in the Plan.  Do you know where everyone is?  Locating missing participants can take up to six months in some cases.
• Government filings and administration must continue as long as any money is left in the Plan.  If one person cannot be located, or doesn’t cash his check, the filings are still required.
• All forfeitures must be allocated to participants in the Plan or used to pay Plan fees.  No funds can be reverted to the employer.
• All Plan assets must be liquidated.  If you have any assets that cannot be sold, you may be stuck.  It is challenging and expensive to find IRA custodians that will hold unusual assets – independent appraisals are required to determine the fair market value of any of these types of illiquid assets.
• Did you know that if you terminate a 401(k) plan you cannot adopt a new Plan for 12-months?  It is much easier to “restate” your Plan with another provider if your current Plan isn’t working for you.
• If you are terminating an ESOP or stock bonus plan, who is going to buy the shares from the Plan?  Participants will want to take their distributions in cash – not shares.
• Defined benefit plan terminations take on a unique situation in low interest rate environments: Additional contributions may be required to terminate the Plan, or the owner’s benefits may end up being reduced to cover the shortfall.

TERMINATION:  Terminating a retirement plan typically takes a minimum of 90 days.  So once the decision has been made, please contact your TPA or Plan provider as soon as possible to get the process started.

Steps to terminating a retirement plan:

• Corporate resolution – The Board (or owners) must formally adopt a resolution terminating the Plan.
• Employee notice – All eligible employees and Plan participants must be notified that the Plan is terminating at some future date.
• Year-to-date census – compliance testing must be performed on the Plan for the final year-to-date period (beginning of the Plan year to termination date.)  Tests must be completed before distributions can begin.
• Investment custodian notification – Your investment custodian will have procedures for discontinuing your contract with them.  There may also be termination-related fees that need to be determined and allocated to the participants before distributions begin.
• Document update – Your Plan document must include all current required language before terminating the Plan. 
• Contributions deposited – all contributions must be made to the Plan including any deferrals, loan payments, or employer contributions for the final Plan year.  Forfeitures, if any, are also allocated based on the Plan formula.
• Distribution election forms – each person with money in the Plan must be given a set of distribution election forms.  They must choose how to receive their account balance from the Plan.  Every effort must be made to find all participants and get their elections completed.  As a last resort, an IRA can be established for those who cannot be located.
• Distributions processed – All distributions are processed only after all of the steps above have been completed, all participant distribution forms have been received, and all fees are paid.
• Final Form 5500 filing – Once all assets have been paid from the Plan, a final Form 5500 is filed with the IRS/DOL.  Annual administration must continue until all assets are distributed from the Plan.  The final filing is due seven months after the date that the assets are all distributed.

IRS approval decision – You may want to submit a request to the IRS to ask that they review your Plan and approve the termination.  This is called a Determination Letter filing.  There is a fee to prepare the filing, and the IRS charges a filing fee.  It can between six (6) and twelve (12) months before the IRS issues the Letter, and no distributions are processed until the Letter is received.  This process is optional.  The Letter gives you some comfort that the Plan met IRS standards at the time of termination, but it does not exempt you from audit in the future.  You may wish to get a legal opinion about whether or not to submit for a Letter.  Most of our clients do not go through this step.

Summary – Terminating a retirement plan is a time-consuming process, especially in handling the participant distribution paperwork.  Administration must continue until all assets have been distributed.  Consider all of the alternatives before making this important decision.  Click here to request a free consultation to discuss terminating a retirement plan.

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