What is the Process for Terminating a 401(k) Plan?

There is a five-part methodology that should be considered for terminating a 401(k) plan, including:

  • Phase 1: Planning & Preparation
  • Phase 2: Announcement & Notification
  • Phase 3: Locate Missing Participants
  • Phase 4: Distribute All Plan Assets
  • Phase 5: Final Plan Termination

Each of these phases are described below.

Phase 1: Planning & Preparation

  • Establish a plan termination date
  • Include all changes in the law or plan qualifications that will be effective on the termination date
  • Cease plan contributions
  • Provide full vesting of benefits for all affected employees
  • Authorize distribution of all benefits in accordance with plan terms as soon as administratively feasible

Phase 2: Announcement & Notification

  • The decision to terminate the plan
  • When it will terminate
  • Resources available to help participants with their distribution, and how participants can take advantage of those resources
  • A 402(f) rollover notice, which includes an explanation of safe harbor and eligible rollover distributions

Phase 3: Locate missing participants

  • Use certified mail
  • Check related plan and employer records
  • Check with designated plan beneficiary
  • Use free electronic search tools

Phase 4: Distribute all plan assets

After all missing participant searches are exhausted and all voluntary distributions are taken, it’s time to distribute the remaining assets into Safe Harbor IRAs. Remember, every penny must be distributed before the plan can be officially terminated. Select a Safe Harbor IRA provider that will take all balances. If you cash out the balances below $1,000 you will likely have lingering headaches due to uncashed or returned checks.

Phase 5: Final Plan Termination:

Once all plan assets have been distributed the last step is to file any applicable final Form 5500 series return.

Next Topic: What Mistakes Do Plan Sponsors Make When Terminating 401(k) Plans?

Terminating a 401k plan - What is the Process?

Sponsors Quick Connect