Terminating a retirement plan? Here’s what you need to know
Employer-sponsored defined contribution retirement plans such as 401(k)s and 403(b)s are an attractive benefit that employees may expect to continue indefinitely. However, employers are not legally required to provide retirement plans to employees, so in certain circumstances, an employer may terminate its retirement plan. “Plans terminate for various reasons,” says Peter Welsh, managing director of retirement and wealth at Inspira Financial, “but the two most common are that the company is going out of business or the company has been acquired and the acquiring company does not want to assume the plan, so they terminate it.”
Whether because of a bankruptcy, acquisition, merger, or voluntary termination, terminating a retirement plan requires a few administrative steps. “For all defined contribution plans held in trust — 401(k), 403(b), etc. — the termination process is essentially the same,” Welsh says.
How to terminate a retirement plan
First, the employer must amend the retirement plan to establish a termination date, stop employee contributions to the plan, and provide full vesting of benefits for all plan participants regardless of the original vesting schedule. Second, the employer needs to let plan participants and beneficiaries know about the plan’s termination and request instruction on how to distribute their benefits.
Third, the employer must pay any outstanding required employer contributions to the plan.
Next, the employer must arrange to distribute all plan assets as soon as possible after the plan termination date.
“Interestingly, there is no actual time limit to distribute the assets,” Welsh says. “But until all assets are distributed, the IRS and the U.S. Department of Labor (DOL) do not consider the plan termination as final.” This means that the employer will still have to file tax paperwork and undergo an audit if the plan still has more than 100 account balances. “For these reasons, the earlier the better,” Welsh adds.
Lastly, depending on the type of retirement plan, the employer must submit certain filings to the U.S. government to alert appropriate agencies that the plan is terminating. These steps are fairly straightforward but can be challenging because of the following issues:
- Plan participants who are no longer employees and are thus difficult to reach
- Out-of-date contact information and the need to locate plan participants
- Non-responsive plan participants and how to handle their funds without their input
Finding missing or non-responsive participants
Oftentimes when an employer is terminating a retirement plan, it cannot find or contact many of the plan’s participants. The employer cannot simply ignore missing or non-responsive plan participants; it must make every attempt to find and contact these people.
The DOL has provided guidelines outlining minimum necessary steps for employers before they abandon efforts to find a missing participant. Those steps are as follows:
- Send notices using certified mail
- Review the records of the employer and any related plans
- Contact the plan participant’s beneficiary
- Use free electronic search tools
After performing the aforementioned steps, the employer may still be unable to find missing accountholders. To finalize the retirement plan’s termination, the employer must roll over those accounts into a safe harbor IRA, interest-bearing bank account, or state unclaimed property fund.
Employers often favor IRA rollovers as a distribution option because it preserves the tax advantages of the plan and keeps the money in a retirement savings account, which benefits missing participants. To set up IRA rollovers for missing participants, employers usually hire an IRA custodian. “An IRA custodian, such as Inspira Financial, is an entity that is licensed to custody IRAs under section 408 of the Internal Revenue Code,” Welsh says.
The benefit of an experienced ally
When terminating a retirement plan, the employer should look for an experienced ally that can seamlessly facilitate and administer IRAs, search for missing participants, disburse benefits, manage uncashed checks, and other plan termination tasks. According to Welsh, the main challenge in providing terminated plan services is finding missing accountholders. “In a bankruptcy, former employees might move, and there is no forwarding address, and we need to search for them,” Welsh points out. “At Inspira Financial, we continue to look for them every year until we find them. In a worst-case scenario in which the accountholder cannot be located, the money will escheat to the state.”
Not only can an experienced IRA custodian set up IRAs for plan participants and conduct rigorous searches for non-responsive plan participants. A skilled custodian can also manage required disbursements to close plan accounts, resolve uncashed checks, and file tax forms. Terminating a retirement plan is a complex undertaking, but with the right partner, it can be less complicated.
How Inspira Financial fits in
Inspira Financial can help simplify the process of terminating a 401(k) or other defined contribution plan. Our solutions include search services, participant notification, disbursements, setup and administration of safe harbor IRAs, and more. Designed to support compliance with DOL guidance, our services will help you seamlessly complete the tasks involved in terminating your retirement plan.
For seamless plan termination, collaborate with an experienced ally.