If your company has decided to terminate its employee retirement plan(s), we can help with completing the administration of your plan(s) and making sure their terminations are completed in compliance with ERISA and IRS requirements as quickly as possible.

Plan Terminations

Make Sure Your Plan is Eligible for Termination

A retirement plan has to meet certain basic requirements in order for your company to be eligible for the various tax benefits it can receive by offering employee retirement plans. The most important is that any qualified plan has to be established with the “intention” of being permanent. (The government does not want companies setting up employee retirement plans as a sort of temporary, short-term tax shelter.)

While regulations do not give a “bright line” test regarding how long is “permanent,” as a general rule of thumb, 401(k) retirement plans should have been in place for at least two years. Defined Benefit plans (also sometimes known as pensions) have to have been extant for at least 5-10 years.

If your plan has not existed as long as mentioned above, you still may be able to show it was intended to be a permanent plan with support documentation that show that “unexpected events” (a huge economic downturn, changes in laws, a company restructuring, and so on) necessitate terminating the plan.

Things to Keep in Mind if You Are Considering Terminating Your Retirement Plan

  1. You do not need approval from the federal government to terminate your plan. But…while there is no legal mandate that you receive approval from the IRS to terminate a plan, the IRS does reserve the right to audit plans, even after they have been terminated. And, because many audits take place up to four years after plan termination, it is probably wise to apply for what is known as a Determination Letter from the IRS while all the information regarding your plan is close at hand. We can help you prepare the documents necessary to get IRS approval of your plan’s termination.

The IRS generally takes at least 9 -12 months to approve a plan’s termination, although the amount of time can be longer if the IRS has a backlog of plan termination requests.

  1. You will need to keep making contributions until your plan has any required notices given to participants and/or amendments are done to cease any required contributions. All of your plan’s ongoing distribution restrictions and obligations also continue because just discontinuing the plan and immediately paying out distributions to employees could subject you – and your employees – to substantial penalties and tax liabilities.
  1. You will need to complete annual administration during the termination process. Annual administration needs to be completed for each year that assets remain in the plan.  Once all assets are distributed, a final Form 5500 must be filed to complete the plan termination.
  1. All participants become fully vested upon termination of a plan. Your employees will become fully vested in any and all contributions you made to their plan. And they can request that distributions from their plan take place as soon as administratively feasible after the termination resolution is complete.
  1. Outstanding Participant Loans become due and payable. If your plan permits Participant Loans and a participant does not pay off the loan upon plan termination, then the outstanding loan balance may be treated as a taxable distribution to that participant.
  1. Liquidity of Investments in the Trust. Certain vendors or investments require notification for a certain amount of time (i.e. 60 days) in advance prior to them liquidating asset(s).  Certain contracts may contain significant surrender charges in order to liquidate prior to their contracted time.
  1. If you are terminating a 401(k) Plan, you may not be able to start another 401(k) Plan for at least 12 months. If you are thinking of terminating your organization’s 401(k) plan, consider it carefully. It may be the case that you do not need to end the plan, but redesign it to better meet your company’s objectives. We can help you explore different plan designs.

Terminating retirement plans is a detailed process. Do not go it alone. The Ryding Company can help guide you securely through a termination’s many twists and turns.