Retirement plans must be established with the intention of continuing indefinitely, according to the IRS. However, employers may terminate their 401(k) plan when it no longer suits their business needs.
Terminating any plan is not a simple objective, but 401(k) plans, and especially safe harbor 401(k) plans, require a high level of attention to detail. To assist in this endeavor, Mary Virginia Boggs, principal and senior compliance consultant at Milliman and Robert M. Kaplan, national training consultant at Voya Financial, assisted advisers on what steps need to be taken when handling the termination of a retirement plan at ASPPA’s 2016 annual conference in National Harbor, Md.
Boggs said the first step to starting a 401(k) plan termination is to provide documentation and extensive communications to all parties participating in the plan. This includes participants who are active, inactive and beneficiaries.
“First and foremost, there needs to be a determination of the resolution,” Boggs said. “This will set things into legal motion up to the termination date.”
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- During this documentation and communication process, the following processes will need to be done in order to amend the plan document:
- Establish termination date
- Adopt a resolution to terminate the plan
- Update document for recent law changes
- Make an amendment to cease contributions
- Indicate distribution of assets will be as soon as administratively feasible
- Full vesting of benefits
- Forced distributions or automatic IRA rollover of accounts greater than $5,000, if the plan has no annuity options plus the employer has no other DC plans, or non-ESOPs.
- SMM will be needed and may be combined with a participant notice
Kaplan said it may be best to eliminate accounts that are less than $5,000 before a client gets to the point of complete 401(k) plan termination.
“For the company that I work for, sometimes we do pricing based on our average account balances,” Kaplan said. “Other times, we ask the employer if they want to deal with an ex-employee or if they want to be responsible for the distribution notices or there is a death of an employee and more than one beneficiary shows up to try and claim the money.”
Until all assets within the plan are finally distributed the plan still remains in effect and cannot be terminated. During this time, Boggs recommends that advisers work with their clients on:
- Distribution requests due to many participants wanting their money immediately and to assist with loan repayments
- Governmental forms and filings
Advisers should remind their clients to use up their forfeiture accounts through expenses, allocating to participants or offsetting final contributions
“You can’t have any unallocated assets going into plan termination and you do have to liquidate,” Boggs said. “You want to make sure the plan termination amendment encompasses everything that the plan document doesn’t already provide.”
While initiating the termination date for the 401(k) plan, Kaplan said setting the final contributions timeframe would be good to do at the same time to ensure that participants are aware of the final deferral date.
“We want to see with the match in particular, obviously in a safe harbor plan the match is 100% vested, but in a traditional tested 401(k), not only what the rules say in a plan document but what was communicated to the participants,” Kaplan said.
Advisers must review their client’s plans and communications to ensure that whatever 401(k) was relayed to the participants is followed through on to ensure all money is dispersed to the correct participants.
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