Companies that establish a 401k tax-deferred retirement plan for you and their other employees normally intend the plan to continue indefinitely. But circumstances, such as business closures, mergers or acquisitions, can arise where the company must terminate the plan. The Internal Revenue Service has established rules and procedures for terminating 401k plans and distributing the funds. The process is complex, and you should be aware of how the process works.
The first step in 401k plan termination requires that the company’s directors adopt a resolution to terminate the plan as of a specific date. The resolution must also freeze the plan in place, suspending payouts until the termination date. Internal Revenue Service and U.S. Labor Department regulations mandate that the company's decision to terminate the plan automatically vests all company contributions to your 401k account, regardless of where you were on the plan’s vesting schedule.
The company must send you and anyone else with money in the plan a notice of plan closure by mail, phone or other means. The company must also give notice to the IRS that the plan is being terminated. The notice to you must include the date of plan termination and what you must do to secure your funds. If you haven't kept former employers updated as to your whereabouts and they shut down their 401k, you might miss the notice. Companies must make extensive efforts to locate participants whose whereabouts are unknown but may not always be successful. The notice must include a contact that can answer any questions you have. You must complete the required paperwork to get your money. Observe the due date. Delay in sending in the forms means delay of your payment.
IRS rules require that 401k plans must be in compliance with all regulations at the time of termination. Companies must conduct an internal compliance audit and correct any shortcomings prior to plan termination. Failure to achieve compliance could subject the company to costly IRS penalties and cause lengthy delays in getting your 401k money paid to you. There's nothing you can do in such a situation except wait. Companies can file a Form 5320 with the IRS, asking it to review their plan and make a determination about whether it is in compliance.
The final part of closing down a 401k is sending your money to you. All funds in the plan must be distributed within one year after the plan’s termination date. If you didn't keep the company aware of your current location or if you didn't return the paperwork, the funds belonging to you must be sequestered in a custodial IRA in your name. Funds belonging to a deceased participant must be paid to the decedent’s estate or heirs. Once all the funds are distributed, the last step in the shutdown process is to file a final termination report to the IRS on Form 5500.
Herb Kirchhoff has more than three decades of hands-on experience as an avid garden hobbyist and home handyman. Since retiring from the news business in 2008, Kirchhoff takes care of a 12-acre rural Michigan lakefront property and applies his experience to his vegetable and flower gardens and home repair and renovation projects.