Plan termination

What plan termination is

The employer adopts a resolution or amendment that sets the termination date and brings the plan document up to date with current law. Contributions stop, all affected participants become 100% vested, and participants are told how to take or roll over their balances. The IRS expects assets to be paid out as soon as administratively feasible, generally within 12 months. A final Form 5500 closes the plan.

Why it matters to employers

Common reasons are closing the business, being acquired, or replacing the 401(k) with a different type of plan. Changing providers is not one of them: that is a conversion, and the plan continues. Starting a new 401(k) within 12 months of paying out a terminated one can break the successor plan rule. Large layoffs can also cause a partial termination, which requires full vesting for the employees affected. The IRS presumes one when turnover exceeds 20%.

Example

A buyer wants a target company’s employees in its own 401(k). Before the sale closes, the target’s board adopts a resolution terminating its plan. Its employees become fully vested and can roll their balances to the buyer’s plan or to an IRA.

Common mistakes

• Leaving assets in the plan for years. Until every account is paid out the plan still exists and still needs filings and amendments.

• Forgetting to fully vest affected participants.

• Skipping the final Form 5500.

• Adopting the termination resolution after a stock sale has closed.