Plan Termination: FAQ
Please note: this “Plan Termination” section only applies to defined contribution plans. If you are terminating a defined benefit or cash balance plan, please contact your actuarial provider for the proper method of terminating the plan.
What Circumstances Might Lead to Terminating the Plan?
Although employers establish retirement plans with every intention of having a long-term retirement vehicle available for employees, there are occasions when the decision is made to terminate them. For example, a law firm might decide to terminate its plan before it is bought or absorbed by another firm that sponsors its own plan and does not wish to keep the retirement plan intact. Or, a plan may be sponsored by a partnership that dissolves. These are only examples. As the circumstances for every occasion differ, it is in your best interest to consult with a benefits attorney or legal advisor to determine whether your firm is impacted by an event that may require such action.
When Must You Terminate the Plan?
Some, but not all, examples of occasions when the plan must be terminated are as follows:
- Firm has dissolved and is no longer doing business,*
- Sole proprietor has passed away and a successor employer will not be continuing the plan, or
- Sole proprietor has retired and a successor employer will not be continuing the plan.
Partial Termination of the Plan
A partial termination of the plan may be triggered if a significant portion of the firm’s employees have severed employment due to firm-initiated employee dismissal such as a layoff. The IRS presumes that a partial termination has occurred if the plan’s turnover rate is at least 20% of the active employees. When a partial termination of the plan occurs, affected participants (e.g., those who are no longer participants due to the event) must become 100% vested. There is no requirement that the plan must be terminated or that other participants be vested or receive distributions.
What Are the First Steps a Plan Sponsor Must Take to Initiate a Plan Termination?
If your firm has determined that the plan will terminate, the first step you may need to take is to notify the participants. If your plan is subject to Section 204(h) of ERISA (e.g., money purchase pension plan, target benefit plan), then the so-called “204(h) notice” requirement applies.** The 204(h) notice must be provided at least 15 days prior to the effective date of the plan’s termination, assuming your plan has fewer than 100 participants at that time. For a plan with 100 or more participants, the notice is required to be provided at least 45 days prior to the effective date of the plan’s termination. Failure to give timely 204(h) notices can mean that benefits continue to accrue until timely notices are provided. See “Filing and Letters” for a snapshot of a sample notice.
What Are the Notice Requirements to Participants?
There are no legally required advance notices for terminating a profit sharing plan or 401(k) plan. However, the Program recommends you notify participants that contributions will stop, accounts will be 100% vested and benefits will be distributed. Participants and other interested parties must be notified in advance if a determination letter request is being filed. Additionally, participants have to receive the normal distribution notices when benefits are distributed (these notices are attached to the Distribution Request Form – see Participants’ Rights).
As described above, a “204(h) notice” must be provided to participants in a money purchase pension plan or target benefit plan. The 204(h) notice must describe the impact of the plan termination and be provided at least 15 days in advance of the date benefit accruals will cease (45 days if the plan has 100 or more participants).
Does Your Plan’s Contribution Percentage Need to Be Amended?
If you sponsor a plan that is subject to minimum funding requirements (e.g., money purchase pension plan, target benefit plan) then the plan must first be amended to decrease the contribution percentage to zero. This should be done at least 30 days prior to the effective date of the plan termination.
Contributions to a profit sharing plan or a profit sharing plan with 401(k) feature are discretionary; therefore, the plan does not need to be amended to decrease the contribution percentage prior to its termination.
Ensure you make the final employer contribution before any distributions take place.
Does Your Plan Need to Be Amended for Changes in Law?
All plans must be amended for recent legislative changes that affect the plan’s qualification prior to termination. Please contact your benefits attorney.
What if Your Plan’s Forfeiture Account Has Assets?
In this instance, any assets in the forfeiture account will need to be reallocated among those participants who would otherwise have been eligible to receive a contribution if one were being made. If you chose to use the forfeiture account to reduce employer contributions, you may be able to use some or all of the balance in the forfeiture account to offset your final employer contribution.
Before reallocating the remaining assets, you should first ensure that the unvested employer contributions of participants who have incurred a five or more year break in service are forfeited. Submitting the Plan Termination Notification Form will help to accomplish this, as well as ensuring that the Program has termination dates for all former employees who still have assets in the plan.
If you need assistance in calculating the reallocation, please provide the Program with the following information:
- Participant names
- Participant Social Security numbers
- Contribution type of forfeiture allocation (your forfeiture account may contain more than one type of forfeited contribution – it is important to provide instructions for all contribution types), and
- Each participant’s compensation for the year in which the plan was terminated (if the plan is being terminated mid-year, provide compensation from the first of the year to the plan’s termination date).
IMPORTANT NOTE: the forfeiture account should be fully depleted before any participant distribution requests are submitted to the Program.
*Please note that in a law firm dissolution, if multiple partners are leaving to form their own firms, they may be able to establish their own retirement plans in the Program. Should this occur, please call 800.826.8901 for more information.
**Note that this notice requirement does not apply to “owner-only” plans, in which only the owners of the firm, or the owners and their spouses, are the only employees of the firm that were ever eligible to participate in the plan.