Terminating a Retirement Plan

Employees, financial institutions and, sometimes, the IRS must be notified

By Wendy Davis

Theoretically, retirement plans are supposed to last indefinitely. But the reality is, there may come a time when you need to end your company's plan. You might merge with another business, for example, or decide to shutter operations. If you do opt to terminate a retirement plan, however, be aware that the Internal Revenue Service might hit you with a hefty tax bill if it decides that the plan was never intended to be permanent. For that reason, be sure to talk with a tax advisor before making any irrevocable moves. If you go ahead with the termination, you'll need to fill out a variety of paperwork and keep your employees abreast of the situation.

The steps required to terminate depend on the type of plan you have. There are several basic models:

Simplified Employee Pension (SEP) or SEP Plus
Savings Incentive Match Plans for Employees (SIMPLE) IRAs
401(k) Plans
Profit-sharing or money purchase pension plans

Terminate SEP Plans

To terminate SEP Plans, inform the bank handling the plan that you intend to end your contract and will cease making contributions; doing so will require filing a plan amendment. Tell employees that you will no longer fund the plan.
Try: The IRS publishes online instructions for terminating SEP plans.

Terminate SIMPLE IRA Plan

You must tell plan participants in advance that you intend to terminate a SIMPLE IRA. The rules state that you must give notice during the calendar year before the termination will take effect.
Try: See the IRS instructions for terminating a SIMPLE plan.

Terminate 401(k) Plans

The steps to end these plans are: Inform the employees, amend the plan document, distribute the assets and file final forms with the IRS. The financial institution that administers the plan may have other paperwork as well.
Try: The IRS requirements include filing the last form 5500 and possibly a form 5300 to ask the IRS to determine the plan's status at the time of termination.

Terminate Profit-Sharing or Money Purchase Pensions

You must give written notice to all plan participants stating that you will stop making contributions. You also will have to execute a formal document terminating the plan as of a certain date. Assets must be distributed to employees as soon as possible, typically within one year. You'll also have to file form 5500 and 5310 with the IRS.
Try: The IRS publishes instructions for completing form 5500, as well as form 5310.