Navigating Voluntary Plan Termination
Voluntary plan termination is the act of discontinuing a defined-benefit plan by an employer. Due to the absence of legal obligation to provide a retirement plan, an employer has the authority to terminate such established plans.
To execute a voluntary plan termination, the plan administrator must comply with the guidelines for either a standard termination or a distress termination. The specifics are detailed in Section 4041 of the U.S. Code of Federal Regulations.
Key Takeaways
- Employers are not legally obligated to offer retirement plans, allowing them the right to terminate these plans voluntarily.
- Plans might be terminated due to bankruptcy, mergers and acquisitions, or transitioning to alternative retirement plans.
- The plan administrator must ensure complete adherence to Section 4041 of the U.S. Code of Federal Regulations during the termination process.
- Participants affected by the termination usually have the option to roll over their assets to another qualified plan.
Understanding Voluntary Plan Termination
The Internal Revenue Service (IRS) specifies that since employers aren’t mandated by law to provide retirement plans, they can initiate plan terminations.
Reasons an employer might terminate a plan include:
- A firm decision to end the plan
- Facing financial bankruptcy
- Business sale or acquisition
- Transition to another retirement plan option
When a plan is voluntarily terminated, the assets must be distributed to participants according to federal law. The employer maintains unilateral authority to anywhere_modify or terminate a retirement plan at any given time as preserved by the Employee Retirement Income Security Act of 1974 (ERISA).
The distribution of plan assets is usually handled by the plan administrator or trustee. It is required that the assets from a terminated plan be dealt with as soon as it’s administratively feasible after the termination is authorized. Participants affected by this can generally roll over distributed funds to another qualified plan or an individual retirement account (IRA).
The IRS notes: “For terminated defined benefit plans with insufficient funds to cover all benefits, the Pension Benefit Guaranty Corporation guarantees vested pension benefits payment up to legally specified limits.
For terminated defined contribution plans like 401(k), 403(b), or profit-sharing plans, participants typically receive the full amount of their vested account balance upon plan termination.”
In instances of defined benefit plan termination, Form 6088 (detailing the distributable benefits) must be filed together with an actuary’s signed and dated certification of the adjusted funding target percentage.
Partial Plan Termination
A plan is considered partially terminated if over 20% of plan participants are laid off within a year. Typically, Partial terminations relate to significant corporate events such as location closures or economic downturns.
Legislation stipulates that all affected employees become fully vested in their account balance upon full or partial plan termination.
Understanding these complexities ensures more informed decision-making and successful navigation through the multifaceted landscape of employment benefits.
Related Terms: Standard Termination, Distress Termination, Employee Retirement Income Security Act (ERISA), Pension Benefit Guaranty Corporation, Individual Retirement Account (IRA).
References
- Internal Revenue Service, “Retirement Topics—Termination of Plan”.
