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Guide to Terminating a Retirement Plan
Employees, financial institutions and, sometimes, the IRS must be notified
By Wendy Davis
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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
Action Steps
The best contacts and resources to help you get it done
 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.
I recommend: 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.
I recommend: 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.
I recommend: 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.
I recommend: The IRS publishes instructions for completing form 5500, as well as form 5310.
Tips & Tactics
Helpful advice for making the most of this Guide
- Plan ahead. You must tell plan participants that you intend to end a SIMPLE IRA in the calendar year before the termination takes effect.
- Retain copies of all documents you submit to the IRS, your bank and your employees.
The official source of Terminating a Retirement Plan is the Pension Plans page at Business.com
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