When terminating a qualified retirement plan, there are undeniably many details. Once the termination and wind up of the trust process begins, questions, loose ends and other “speed bumps” can slow down the process considerably. In this article, we provide what we consider to be the top five speed bumps encountered when assisting plan sponsors and their internal administrators in completing the plan termination process.
There are actually two definitions or meanings to “plan termination” in the eyes of the IRS. The first is the overt act of the plan sponsor to adopt a plan amendment to “terminate” the plan. That is seemingly pretty straightforward. You determine whether the plan has all of its necessary qualifying provisions, adopt those provisions, as needed, and declare a termination date. The other definition or meaning is the complete “wind up” of the plan and trust with all assets paid out to participants and beneficiaries and the final IRS Form 5500 (closing out the final plan year) having been filed.
The wind up of the plan and trust must be completed within 12 months of adopting the termination amendment and the established termination date. If not, the IRS will consider the plan ongoing and not terminated. Therefore, the plan sponsor would need to continue to file Form 5500, including plan audits, if necessary. Any or all of the plan’s other operational qualifications, ERISA compliance matters and plan document qualification requirements would continue to apply.
Top 5 Questions
Without further ado, the following are the top five questions that come up creating speed bumps along the plan termination journey.
Will the plan termination create a short plan year?
If the plan year is less than 12 months, the annual IRS compensation limit under IRS 401(a)(17) and the annual additions limits under IRC 415(c)(1)(A) are required to be prorated for the number of months in the short plan year. This can often be overlooked. If the plan has a last day allocation requirement or 1,000 hour eligibility or vesting requirement, this should also be addressed in the plan termination amendment.
Has the Trustee selected a custodian for auto-rollover IRAs?
The plan document or terminating amendment should include “cash out without consent” provisions to address small account balances and specific steps provisions for how to handle unresponsive participants. An IRA custodian should be selected no later than the date the participant election forms are provided so the final distribution process can flow smoothly to avoid any delays with the final distribution of assets.
Does the plan have any outstanding payables or receivables?
Plan sponsors should verify whether the plan has any uncashed checks pending or receivables that have not been deposited. The plan and trust are not terminated until 100% of the trust’s assets are liquidated and distributed to participants or used for the costs of final administration of the plan. Exhaustive efforts should be made to locate plan participants with uncashed checks so those checks can be cashed or reissued. If such plan participants cannot be located, their information must be provided to the third party administrator so that auto-rollover IRAs can be established. If there are any receivables due, these should be deposited to the trust prior to distribution forms being sent to participants.
Does the plan have a current IRS determination letter?
The plan document should be reviewed prior to adopting the terminating amendment and resolutions to determine whether there are any plan document provisions that may be out of compliance. The plan should be amended to fix those provisions, and to add any amendments that the IRS requires that are not covered by the current determination letter. If the employer has amended the plan after the date of the current determination letter, then the plan sponsor should file an application for a determination effective as of the termination date. The plan sponsor may want to restate the plan document onto a pre-approved plan document, which has received an IRS Opinion letter.
Is the company paying dividends on employer stock?
If a C corporation is planning to declare a dividend on the company stock and it sponsors an ESOP, it needs to allocate the dividend to all ESOP participant shareholders. This could delay calculating participant balances. The company should review their bylaws to determine what rules may apply to the timing of declaring the dividend and/or recording the dividend. This could also apply to an S Corporation that sponsors an ESOP which holds less than 100% of the company stock.
There can be several unanticipated speedbumps in the termination and wind up process. The plan administrator must consider as best they can the many details and tasks that are critical for the plan and its trust to be wound up. It is advisable to gather all of the plan’s advisors and resources together at one time to help flush them out. Some speed bumps can be avoided by creating a sequence and timeline prior to taking the first step of adopting any terminating amendments and resolutions.
