The retirement plan termination process varies depending on the type of plan that is terminating:
- Defined benefit plans not covered by the PBGC
- Defined benefit plans covered by the PBGC
- Defined contribution plans
Defined Benefit Plans NOT Covered by the PBGC
Q: I want to terminate my defined benefit plan. What is the soonest date I can do so?
A: Participants (active and terminated) of small DB plans must be given a 15-day notice of the upcoming termination. Therefore, if you notify your TPA today, your termination date will likely be in 20 days.
The amendment/resolution to terminate the plan then must be signed prior to the established termination date.
Q: Once the termination date occurs how long will it be until I get a distribution of my benefit?
A: It depends: Are you going to file the plan with the IRS for a determination letter upon termination? If so, it will take some time to prepare the filing and once filed, the IRS can take 6-9 months to complete their review.
If you will not file with the IRS, then distributions can commence as soon as the retirement plan termination date has passed. Your TPA should provide you and all plan participants with distribution paperwork. This paperwork will enable plan participants to elect how their distribution will be made (i.e., rollover, etc.).
Typically all the rank-and-file employees’ benefits are distributed prior to the owner’s benefits. There could be additional delays if any participant elects an annuity form of payment. You will be required to purchase a guaranteed annuity using plan assets. You will be provided more information, if applicable.
Q: Is there anything I can do to speed up the process?
A: Make sure that you have good addresses for all participants with a benefit in the plan. Retirement plan terminations are often delayed due to the plan sponsor’s inability to locate a participant.
Q: Once everyone is paid out – is that it?
A: Probably not. Depending on when the plan is terminated and paid out, there may be an additional actuarial valuation or Form 5500 due. Your TPA will outline all the remaining reporting needed.
Finally, distributions from retirement plans must be reported on Form 1099-R. These forms are prepared after the end of the year in which the distributions take place.
Defined Benefit Plans Covered by the PBGC
Q: I want to terminate my defined benefit plan. What is the soonest date I can do so?
A: Participants (active and terminated) of small DB plans must be given a Notice of Intent to Terminate 60-days prior to the termination date. Therefore, if you notify your TPA today, your termination date will likely be in 65-70 days.
The amendment/resolution to terminate the plan then must be signed prior to the established termination date.
Q: Once the termination date occurs how long will it be until I get a distribution of my benefit?
A: The retirement plan termination must be filed with the PBGC under their Standard Termination Process. Prior to the submission, the participants must receive a Notice of Plan Benefits. You can expect the submission to be ready within 30-60 days after the retirement plan termination date.
Once they receive the submission, the PBGC has a 60-day review period. Once the 60 days has passed, distributions can begin. That is unless you plan to file for a determination letter upon termination with the IRS. If you plan to do so, it will take some time to prepare the filing and once filed, the IRS can take 6-9 months to complete their review.
Your TPA should provide you and your employees with distribution paperwork. This paperwork will enable plan participants to elect how their distribution will be made (i.e., rollover, etc.).
Typically all the rank-and-file employees’ benefits are distributed prior to the owner’s benefits. There could be additional delays if any participant elects an annuity form of payment. You will be required to purchase a guaranteed annuity using plan assets. You will be provided more information, if applicable. The distribution deadline imposed by the PBGC depends on whether a request for an IRS determination letter was submitted.
If a request was submitted, the deadline is 120 days after receipt of the IRS determination letter. If there was no submission to the IRS, the distribution deadline is 180 days after the 60-day PBGC review period has lapsed.
Q: Is there anything I can do to speed up the process?
A: Make sure that you have good addresses for all participants with a benefit in the plan. Retirement plan terminations are often delayed due to the plan sponsor’s inability to locate a participant.
Q: Once everyone is paid out – is that it?
A: No, the final PBGC premium must be paid and the Post-Distribution Certification must be submitted to the PBGC. In addition, depending on when the plan is terminated and paid out, there may be an additional actuarial valuation or Form 5500 due. Your TPA will outline all the remaining reporting needed.
Finally, distributions from retirement plans must be reported on Form 1099-R. These forms are prepared after the end of the year in which the distributions take place.
Defined Contribution Plans
Q: I want to terminate my defined contribution plan. What is the soonest date I can do so?
A: You can terminate the plan immediately. If the plan is a money purchase plan, there is a 15 day advance participant notification.
The amendment/resolution to terminate the plan must be signed prior to the established termination date.
Q: Once the termination date occurs, how long will it be until I get a distribution of my benefit?
A: It depends: Are you going to file the plan with the IRS for a determination letter upon termination? If so, it will take some time to prepare the filing and once filed, the IRS can take 6-9 months to complete their review.
If you will not file with the IRS, then distributions can commence as soon as the retirement plan termination date has passed. Your TPA should provide you and your employees with distribution paperwork. This paperwork will enable all plan participants to elect how their distribution will be made (i.e., rollover, etc.).
Typically all the rank-and-file employees’ benefits are distributed prior to the owner’s benefits. If this is a money purchase plan, or a plan with transferred assets from a money purchase plan, an annuity form of benefit must be offered. This could result in additional delays if any participant elects an annuity form of payment. You will be required to purchase a guaranteed annuity using plan assets. You will be provided more information, if applicable.
Q: Is there anything I can do to speed up the process?
A: Make sure that you have good addresses for all participants with a benefit in the plan. Retirement plan terminations are often delayed due to the plan sponsor’s inability to locate a participant.
Q: Once everyone is paid out – is that it?
A: Probably not. Depending on when the plan is terminated and paid out, there may be an additional valuation or Form 5500 due. Your TPA will outline all the remaining reporting needed.
Finally, distributions from retirement plans must be reported on Form 1099-R. These forms are prepared after the end of the year in which the distributions take place.