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IRS Roadmap for Terminating a Qualified Plan

The IRS has released the Employee Plans Newsletter for August 2014.  The Newsletter summarizes the steps that must be taken in order to terminate a qualified plan and provides links to additional guidance, including materials used by the IRS to review terminating plans.

The Newsletter provides a useful checklist of the tasks for terminating a qualified plan:

  • Amend the plan to establish the termination date, make all changes required by the termination date, cease plan contributions, fully vest the benefits of affected employees and authorize the distribution of benefits.
  • Notify participants and beneficiaries of the termination.
  • Provide rollover notices.
  • Make outstanding employer contributions.
  • Fully vest affected participants.
  • Distribute plan assets.
  • File a final Form 5500.

 

It is also good practice to file a request for the IRS to issue a determination on the plan’s qualified status at termination.  Obtaining a favorable determination letter is not a prerequisite for terminating a qualified plan, but it does provide added assurances that the plan has met all of the necessary requirements for qualification.  In many cases, amendments are required regardless of whether the remedial amendment period remains open as of the date of termination.  Additional information about these amendments is available here.

Qualified Plans: How NOT to Terminate Them to Avoid Mistakes

Qualified Plans Should Be Terminated Properly

More than 75 percent of the plan sponsors who participated in the Employee Plans Compliance Unit (EPCU) Termination Project failed to take all the steps necessary to complete the process of terminating their qualified plans.  Among the mistakes catalogued by the EPCU were the following:

 

  • Distributing all plan assets, but not marking Form 5500 as final.

 

  • Failing to distribute all plan assets as soon as administratively feasible after the plan termination.

 

  • Ignoring the requirements for locating missing participants and beneficiaries.

 

  • Confusing frozen and terminated plans.

 

  • Using the wrong plan number.

 

Although terminating a plan is both time-consuming and complex, plan sponsors can avoid making mistakes by careful and methodical planning.