RSM Resources

While many people think of a retirement plan as an "eternal"employee benefit, companies sometimes need to terminate or modify theiremployee retirement plans.

For example, if your company isclosing, being acquired, acquiring another business or just changingretirement plan providers, the company will likely need to terminateits existing plan. Regardless of why a plan ends, though, the plansponsor must take important amendment, notification and filing steps toavoid regulatory and compliance issues, and to fulfill legal, tax andemployee obligations.

Plan types and requirements

Eachtype of retirement plan has its own set of rules to follow upontermination. Plans vary by structure, number of plan participants, andcontribution amounts and limits.

Major retirement plan categories include:

SEP or SAR-SEP plans. A plan sponsor can discontinue a simplifiedemployee pension (SEP) or salary reduction simplified employee pensionplan (SAR-SEP) at any time. Though the sponsor is under no legalrequirement to do so, sound business practice dictates the sponsorshould communicate the change to employees and notify the financialinstitution that manages the plan. The IRS does not requirenotification when this type of plan ends.

SIMPLE IRA plans.A plan sponsor can terminate a savings incentive match plan foremployees (SIMPLE) IRA plan by notifying affected participants. Becauseof this plan’s annual notice requirement, unless the business isclosing, one can terminate it only in the next calendar year, andcontributions must continue until then. Again, there is no need tonotify the IRS.

Qualified defined contribution plans, 401(k),profit sharing, employee stock ownership and money purchase plans havemore-complicated termination requirements. In this situation, it’snecessary to prepare a formal plan for termination with a specific enddate and publish a written announcement to all participants explainingthat plan contributions will be ending.

In the case of a moneypurchase plan, the Internal Revenue Code and the Employee RetirementIncome Security Act (ERISA) require that participants receive a minimumnotice of 15 days for a small plan (fewer than 100 participants) or 45days in the case of a larger plan. Federal law requires planparticipants to be fully vested in their account balances when the planends.

After the termination date, the sponsor must distributeplan assets as soon as "administratively feasible," which the IRSgenerally views to mean within one year of plan termination. Thesponsor must continue to file its annual Form 5500 report at the U.S.Department of Labor until it has distributed all plan assets. Youshould also consider filing the optional IRS forms to receive adetermination letter from the IRS stating that the termination of theplan will not adversely affect its qualified status. This valuableprocess confirms that plan participants will continue to have atax-favored status when receiving their distributions.

Defined benefit retirement plans.Defined benefit plans also have significant IRS and Pension BenefitGuaranty Corporation (PBGC) requirements for termination. Ending such aplan involves amending the plan document and determining the benefitfor each participant, distributing all assets, and filing all finalgovernment reports and forms. With respect to any plan covered by thePBGC, employees must receive notice at least 60 days before the planends, and the employer must seek PBGC permission to terminate. Like a401(k) or other defined contribution plan, the employer should seek IRSapproval of the determination.

Employees should also receivenotification of their tax status so they understand how the IRS willtreat disbursements when employees eventually withdraw funds from theplan.

For qualified retirement plans, common IRS forms for completing the termination process include:

• Forms 5310 and, if yours is a defined benefit plan, Form 6088 to receive an IRS determination letter stating that your plan remains a qualified plan with its tax benefits.
• Form 5310-A, for when your plan is part of a plan merger, consolidation, spinoff or transfer.
• Form 5500, the annual summary and financial report for your retirement plan.

Inaddition to these federal requirements for ending a retirement plan,state rules may apply. Your attorney, accountant and tax advisor canhelp you during this process and are essential to understanding thefull implications of your decisions. Also, be sure to date and documentevery plan notification and termination action you make, along with thenames and contact information of any IRS representatives or otherregulators you may be working with.

If you are changing anemployee retirement plan in order to switch to a different provider,consider another set of administrative steps. In addition to notifyingaffected participants and enrolling them in the new plan, you willlikely need to hold and announce a transitional "blackout" period whenparticipants cannot change their investments. This period will providetime to transfer plan assets between providers and reconcile records.

Opening the communication channels

Whetheryou are ending or changing a retirement plan, employees and theirfamilies will understandably express concerns about the process and howit affects them. Be prepared to communicate actively and openly withplan participants, clearly explaining the changes — what exactly theymean to employees and what actions employees must take. Expect a spikein employee calls to your human resources department along withadditional requests to your plan administrator, and gear up to provideemployee resources in print and online.

By working closelywith your administrative team and keeping the communication channelsopen, your retirement plan termination can be a well-managed, orderlytransition for your business and employees.