Why Do Qualified Plans Terminate?
Plans can terminate for a variety of reasons, including:
- Merger or acquisition
- Consolidation of qualified plans
- Business closure
What is the Process for Terminating a 401k Plan?
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.
What Mistakes Do Plan Sponsors Make When Terminating 401k Plans?
Typical errors that plan sponsors make:
- Do not file a final Form 5500 series return
- Do not actually terminate their plan
- Mistakenly indicate the plan is terminated when it is frozen
- Mistakenly use the same plan number from a previous or different plan
- Distribute all plan assets but don’t mark the final Form 5500 series to show it is the final return
- Distribute all plan assets but do not indicate zero assets at the end of the plan year
- Do not distribute all plan assets as soon as administratively feasible (*generally within 12 months)
Why did plan sponsors make these errors?
- Length of time required to find missing participants
- Difficulty in distributing certain types of plan assets (real estate or partnership investments)
- Not aware all plan assets must be distributed
- Not aware of the difference between a frozen and terminated plan
- Not aware there were still assets in the trust
More Information on Terminating Plans
What Are the Criteria Plan Sponsors Should Look For in a Terminating Plan Service Provider?
#1 – Deliver a full range of services including:
- Mailing of required participant notices
- Participant address verification
- Multi-lingual call center support for responding participants
- Safe Harbor IRAs for unresponsive participants
#2 – Have expertise in locating missing participants
The DOL is very specific about what is required if a participant is deemed to be “missing”. When selecting an outsourced provider make sure they have a proven track record of fulfilling those requirements including:
- Verification of/updates to participants’ last best-known address
- Locating beneficiaries of deceased participants
- Utilization of multiple web-based resources
- Oversight of USPS Certified mailing
#3 – Focus on minimizing cash outs and promoting account consolidation
Unfortunately many participants will be tempted to cash out their retirement savings during a plan termination.
To help reduce cash outs and increase retirement account consolidation to an existing account, like a new employer’s plan, make sure the provider has professionals who will provide distribution counseling.
#4 – Offer fiduciary-friendly Safe Harbor IRAs and on-going account support
- Continuous efforts made to locate missing account holders
- Straightforward, easy-to-understand fee structure
- Monthly account maintenance fee vs. annual fee
- No lock-up provisions
- Ability to move assets to more suitable investment options
- Account consolidation service
#5 – A proven track record in facilitating plan terminations:
- How long they’ve handled terminating plans
- The number of terminating plans they’ve worked with
- The mix of large vs. small plans
Working with the right plan termination service provider can alleviate a lot of headaches and save a lot of time. To learn more about the plan termination services of RCH call 1-866-827-9608 or email firstname.lastname@example.org.