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How To Properly Terminate A Retirement Plan: A 7-Step Guide

August 24, 2020

In general, retirement plans are established with the objective of continuing indefinitely. However, business owners may opt to terminate their plan when it no longer satisfies their business needs, or if they wish to establish a different type of plan. Regardless of the reason, plan sponsors must complete several steps in order to effectively terminate their plan.

The size, complexity, and length of time the Plan has been in existence will determine the specific steps required to terminate the Plan. Most Retirement Plans are required to accomplish the following actions:

1) Establish the date of termination & provide notice to all interested parties

The Board of Directors shall meet, approve the termination and execute a Board Resolution identifying the date the Retirement Plan will be effectively terminated. The employer must also provide a timely notice to all eligible employees and Plan accountholders that the said Retirement Plan will be terminated.

2) Freeze the plan from future benefits 

If you are terminating a Plan or establishing a new/different Plan, you are required to freeze the Plan and its activities, including suspending benefit payments for a period of time.

3) Review current plan and check for compliance issues 

At the time of termination, a Retirement Plan must be in compliance with all current laws and regulations. All IRS Interim amendments must be adopted, and Plan violations should be identified and corrected

4) Value plan assets

The present value of all Plan assets shall be calculated at the time of termination and reports. Any decreases or increases in the value of Plan assets occurring during the termination period shall be allocated between the Plan and the corporation as agreed upon by the corporation and the Plan administrator.

5) File notice of termination with appropriate governmental agencies

Depending on the type of Plan, there are various government filings that must be completed. The most commonly required filing is a closing, or final IRS Form 5500, alerting the IRS that the Retirement Plan is terminating.

6) Distribute all plan assets 

At the time of termination, all account balances become immediately and full vested at 100% and must be distributed to accountholders accordingly. This action alone can take a significant amount of time as testing must be accomplished, all participants must be located, consent to the distribution needs to be obtained (depending on the balance in the account), withholding must be calculated, and the amount of benefits payable to each participant shall be calculated, to mention a few.

7) File "final" IRS Form 5500

Once all assets have been removed from the Retirement Plan, you can and are required to file the “final” IRS Form 5500 with the Department of Labor.

 

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.

 

Be sure to check out the Plan Termination Services page, and feel free to contact our team with any additional questions. 

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We know the plan termination process can be confusing, difficult, and most of all, time-consuming. The experts at LRS are here to help guide your company through this process. 

Plan Termination Services

form 5500

Do you participate in a retirement plan and need a copy of your Retirement Plan’s IRS Form 5500? Here's what you need to know: 

Form 5500 Post

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