Read Rains Plan Group 401k plan termination FAQ text version


401(k) Plan Termination FAQs

Internal Revenue Code § 401(a) requires that a retirement Plan shall be establish by an employer with the intent to offer a permanent and continuing retirement program to employees. Although a 401(k) Plan must be initially established with the intention of continuing indefinitely, an employer may fully terminate the 401(k) Plan at its discretion but only after taking certain formal and required steps. The requirements for terminating a retirement Plan are largely detailed in ERISA §§ 4041-4050 and 29 USC §§ 1341-1350. How long does the termination process take? There are many steps that must be taken to ensure proper termination of a 401(k) Plan and there are various factors that contribute to the overall time to complete a Plan termination. Generally, if the 401(k) 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. I closed my business and filed the Corporate dissolution paperwork. That terminated the Plan, right? No, filing dissolution paperwork for a corporation does not also terminate a 401(k) Plan. A 401(k) Plan is governed by the IRS and DOL, not the Secretary of State, like your business, and therefore you must terminate your 401(k) Plan with the proper agencies. What steps are required to properly terminate a 401(k) 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 401(k) Plans are required to accomplish the following actions: 1. Establish the date of termination & provide notice of Plan termination to all interested parties- The Board of Directors shall meet, approve the termination and execute a Board Resolution identifying the date the 401(k) Plan will be effectively terminated. The employer must also provide timely notice to all eligible employees and Plan accountholders that the 401(k) Plan will be terminated. RPG's Plan termination service includes the necessary Meeting Notice, Meeting Minutes and Resolution, in addition to employee notices. 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. RPG will provide the required notice of suspension to interested parties. 3. Ensure the Plan is in compliance- At the time of termination, a 401(k) 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. Your Pension Administrator will conduct a review of the Plan documents and prepare any amendments and other documentation necessary to bring the Plan documents into compliance. We do not complete a historical audit of all past Plan activities to identify Plan violations, however, if we do identify a Plan violation, during the course of terminating the Plan, RPG offers correction services to assist with the correction of such Plan violation(s).

Rains Plan Group, LLC 2324 Eastlake Ave. East, Suite 505, Seattle, WA 98102 Tel.: (206) 388-4170 [email protected] Fax: (206) 299-9409 DOCID: 101534

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4. Value Plan Assets-The present value of all Plan assets shall be calculated as of the time of termination and reports. Any decrease or increase 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. RPG will calculate the value of Plan assets at the time of termination. 5. File notice of termination with the 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 401(k) Plan is terminating. We also recommend the filing of IRS Form 5310, requesting that the IRS review the Plan and issue a letter of determination, starting the clock running on the statue of limitations. (See below for more information regarding each specific form.) RPG will prepare and provide IRS required filings, including Form 5500 and 5310. 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. RPG will work with you to assure all assets are distributed in the appropriate amounts to the necessary accountholders, in a timely manner. The Plan holds qualified employer securities (corporate stock), are there any special requirements when terminating the Plan? Any and all assets in a retirement Plan must be "redeemed", a process that includes approving the redemption of the assets, liquidating the assets and transferring or distributing the assets. Under certain circumstances a distribution, in kind, of the corporate stock, 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). We encourage you to seek assistance from qualified professionals, like Rains Plan Group, to assist with the complex requirements related to terminating a Plan that holds qualified employer securities. Can I complete a Plan termination on my own? 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 401(k) 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 accomplish my Plan termination? Again, any person can accomplish the steps to terminate a 401(k) Plan, but it is not recommended and we encourage you to secure the services of a skilled and capable Pension service provider, like Rains Plan Group. You

Rains Plan Group, LLC 2324 Eastlake Ave. East, Suite 505, Seattle, WA 98102 Tel.: (206) 388-4170 [email protected] Fax: (206) 299-9409 DOCID: 101534

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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 to hire an attorney to assist with the Plan termination? An attorney is not required, but is recommended if you are also closing your business or redeeming Qualified Employer Securities that have been purchased by the Plan. Rains Law Group, PLLC employs employee benefits and tax attorneys and can advise and represent you during a Plan termination. If you are unsure whether or not your situation would benefit from working with an attorney, contact Rains Plan Group and speak with a Pension Administrator. Why do I need to meet all of these requirements for a Plan termination, I was the only employee (or I was the only Plan participant)? 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. Why should I submit an Application for Determination via IRS Form 5310? 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 highly recommended that a terminating Plan submit for a favorable determination letter. I have never used the 401(k) Plan; do I have to terminate the Plan? 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 401(k) 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. I cannot find, or do not have, the documents supporting my decision to terminate the Plan. Do I need them? 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. I am not sure what I need to do. Who should I contact? Contact Rains Plan Group and speak with a Pension Administrator if you need help getting started. Call us at 206388-4170 or email us at [email protected]

Rains Plan Group, LLC 2324 Eastlake Ave. East, Suite 505, Seattle, WA 98102 Tel.: (206) 388-4170 [email protected] Fax: (206) 299-9409 DOCID: 101534

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Rains Plan Group 401k plan termination FAQ

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