How Long Does It Take to Terminate a 401(k) Plan?
There are many steps that must be taken to ensure proper termination of a Retirement Plan and there are various factors that contribute to the overall time to complete a Plan termination. Generally, if the Retirement Plan has had minimal activity, few participants, and comprehensive records, this process can be accomplished rather quickly (2-3 months). A larger Plan with significant historical participant activity, will result in a more comprehensive and lengthy termination process. If you elect to submit to the IRS Determination Letter program, the process may take, on average, one year and even beyond two years.
Does Dissolving My Corporation Terminate the Retirement Plan?
No, filing dissolution paperwork for a corporation does not also terminate a Retirement Plan. A Retirement Plan is governed by the IRS and DOL, not the Secretary of State, like your business, and therefore you must terminate your Retirement Plan with the proper agencies.
Terminating a Plan That Holds Private Stock or Other Non-Traditional Assets
Any and all assets in a retirement Plan must be “redeemed”, a process that includes approving the redemption of the assets, liquidating the assets (or distributing in kind or transferring in kind) and transferring or distributing the assets. Under certain circumstances a distribution, in kind, of the corporate stock and other non-traditional assets, may be possible.
Certain plan assets, such as mutual funds are fairly easy to liquidate, a task that can be accomplished rather quickly. Unlike mutual funds, redemption of employer securities involves additional requirements and also takes time to complete. The process of redeeming employer securities requires a valuation of the corporate stock prior to redemption, approval by the Corporation of the redemption, and notice to plan participants of the redemption. The stock must be sold by the Plan, back to the Corporation for adequate consideration pursuant to ERISA § 408(e). Our walkthrough of how to exit a ROBS plan covers the redemption mechanics in detail.
We encourage you to seek assistance from qualified professionals, like Leading Retirement Solutions, to assist with the complex requirements related to terminating a Plan that holds qualified employer securities.
Can I Terminate a Retirement Plan Myself?
A Plan sponsor can complete the steps to accomplish a Plan termination; however, we do not recommend that an employer take on this task alone. As mentioned above, there are many steps required to properly terminate a Retirement Plan and failure to complete each step properly could result in significant fines and penalties assessed by the IRS and/or DOL.
Can Any Service Provider Handle a Plan Termination?
Again, any person can accomplish the steps to terminate a Retirement Plan, but it is not recommended and we encourage you to secure the services of a skilled and capable Pension service provider, like Leading Retirement Solutions. You want to make sure that the provider you choose is qualified and is willing to perform the many requirements of a Plan termination. Some Pension service providers, in particular, will not prepare IRS Form 5310 for you. IRS Form 5310 can be a very beneficial filing, starting the clock running on the amount of time the IRS has to audit your Plan.
Do I Need an Attorney to Terminate a Retirement Plan?
An attorney is not required, but is recommended if you are also closing your business or redeeming non-traditional or non-standard assets that have been purchased and held by the Plan. If you are unsure whether or not your situation would benefit from working with an attorney, contact Leading Retirement Solutions and speak with a Plan administrator.
Do Owner-Only Plans Have to Meet the Same Termination Requirements?
An active Plan, even an “owner-only” Plan is required to complete annual compliance testing, regardless of whether the owner made contributions to the Plan. The compliance tests should be completed and reviewed to make sure the Plan did not commit any prohibited transactions.
Should I File IRS Form 5310 When Terminating a Plan?
By submitting the Form 5310, you are asking the IRS for a favorable determination letter, which is the IRS’ approval of the Plan document at the time of termination. With the IRS stepping up its audit activities, it is recommended that a terminating Plan submit for a favorable determination letter. You cannot, generally, submit this form if there are no assets remaining in the retirement plan. The agency answers further questions on the process in its plan termination FAQs.
Do I Have to Terminate a 401(k) Plan I Never Used?
You still must complete certain required actions assuring that proper notice is provided to the IRS of the Plan termination. Just because a Plan has not been used does not mean it is terminated. Your Retirement Plan was assigned a Federal Employer Identification Number (EIN) when it was established. Therefore, the IRS is aware of its existence. If you fail to file a final/closing IRS Form 5500 letting the IRS know your Plan has been terminated, they will assume your Plan is active. An active Plan is required, under most circumstances, to file an annual IRS Form 5500. Should the Plan fail to file this form, the IRS will assess fines and penalties of $10-25 per day from the date the form was originally due. So, if you fail to inform the IRS of the terminated status, you can come under audit by the IRS and end up with costly fines and penalties. The IRS has little tolerance for Plan sponsors who did not take the required steps to terminate even a Plan that was never used.
What Records Do I Need to Keep After Terminating a Plan?
As a business owner, you are responsible for keeping records for a minimum of 7 years and even 10 years for certain documents. With that said, if the IRS decides to audit your Plan, you will be required to supply any and all documentation supporting your decision to terminate the Plan. You should store in a safe location, all documentation required by ERISA §§ 4041-4050 and 29 USC §§ 1341-1350. If you cannot find your records, it is recommended that you contact the provider you worked with and obtain copies.
The termination process is complex and time consuming but absolutely mandatory. The experts at LRS specialize in plan terminations and can help your business through this difficult process. Where a filing or a required step has already been missed, our consulting and correction services cover the routes available.
Helpful Resources
- IRS, 401(k) plan termination — the required steps, the “as soon as administratively feasible” standard, and what makes a plan an ongoing plan.
- IRS, Retirement plans FAQs regarding plan terminations — determination letter timing, filing windows, and required amendments.
- IRS, About Form 5310 — the application for determination on termination, now filed electronically through Pay.gov.
- Department of Labor, Form 5500 series — the annual return, including the final filing for a terminating plan.
- IRS, Filing notices for Forms 5500, 5500-SF, 5500-EZ and 5558 — current late-filing penalty amounts.
- IRS, Correcting plan errors — the correction programs available where a required step was missed.
Be sure to check out the Plan Termination Services page, and feel free to contact our team with any additional questions.
