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Planning to Terminate Your Qualified Retirement Plan? Here are some Key Considerations

May 06, 2024

Are you considering terminating your qualified retirement plan? Plan sponsors consider termination when facing a merger/acquisition or bankruptcy. What should you factor in when considering a plan termination? We explore here.

Is your retirement plan no longer suiting your company’s needs? If you’re considering terminating your plan, there are some things you should take into account. Let’s dive in.

What are the reasons for terminating a plan?

  • Company is going out of business
  • Company has been acquired and the acquiring company does not want to assume the plan
  • Voluntary termination

How do you go about terminating a plan?

  1. Amend the retirement plan. This includes:
    1. Establishing a termination date
    2. Halting employee contributions
    3. Providing full vesting of benefits for all participants upon termination date (regardless of original vesting schedule)
  2. Notify and provide a rollover notice to all plan participants and beneficiaries
  3. Pay any outstanding employer contributions to the plan.
  4. Arrange to distribute all plan assets as soon as possible after the termination date. Generally, within 12 months all plan assets should be distributed.
  5. File applicable final Form 5500.

What if you cannot find or contact a plan participant?

When terminating a plan, it can be tough to track down all of the plan’s participants. However, it is crucial to make every effort to locate all participants. The DOL recommends:

  • Sending notices using certified mail
  • Reviewing the records of the employer and any related plans
  • Contacting the plan participant’s beneficiary

If after exhausting all efforts, the Company still cannot locate a participant, the employer must roll over the account into an IRA, interest-bearing account or state unclaimed property fund.

What happens when a plan has not distributed its assets?

If you have not distributed the qualified retirement plan’s assets, it is considered an ongoing plan. Hence, it must continue to meet the qualification requirements.

What’s the number one thing you should consider before terminating?

In addition to business-related considerations such as cost and employee relations, there are a number of potential legal and logistical issues to address. As soon as you consider terminating your plan, you should check with your plan’s financial institution and third-party administrator to see what further action is necessary to terminate your plan and you should document all actions taken during this process.

Questions? Do you need help terminating your plan? Contact any member of our Employee Benefit Plan Services Group.

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