A 401(k) plan is terminated when the plan sponsor decides to stop sponsoring the plan. In most cases, the plan sponsor can terminate their plan at their discretion. However, terminating a plan requires more than a mere decision by the sponsor. The IRS website states that "The IRS considers a 401(k) plan terminated only if:
A 401(k) plan that has not distributed its assets as soon as administratively feasible is considered an ongoing plan and must continue to meet the qualification requirements, including amending the plan document for law changes. If you maintain another plan, you may have to transfer employees' elective deferral accounts to the other plan rather than distributing them to employees." It is also possible to only partially terminate a 401(k) plan. This can happen if the sponsor makes a change or takes action that causes a significant decrease in plan participation (usually at least 20%). The IRS website states that a plan can be partially terminated due to "Layoffs, plan amendments, or business reorganizations that cause a decrease in plan participation are counted even if they result from economic circumstances beyond the employer's control." There are special considerations for those who are partially vested in the plan being terminated. All plan participants automatically become 100% vested in the plan on the date of termination, regardless of the actual vesting schedule or how far along each participant was in the schedule.
Reasons for 401(k) Termination
401(k) Plan Termination FAQs
A 401(k) plan is a retirement plan offered by an employer designed to help employees save for retirement.
A 401(k) plan is terminated when the plan sponsor decides to stop sponsoring the plan. In most cases, the plan sponsor can terminate their plan at their discretion.
You must submit a written request to the administrator of your 401(k) plan and provide them with instructions on how you wish to proceed with terminating the plan.
When you terminate your 401(k) plan, any vested funds in the account will be distributed according to the terms of the plan document and any applicable laws. Depending on your situation, you may be able to transfer or roll over some or all of those funds into another qualified retirement savings vehicle, such as an IRA or another employer's qualified retirement plan.
Generally, no. Unless your plan documents state otherwise, there are usually no fees or penalties associated with terminating a 401(k) plan. However, any applicable taxes may apply to distributions from the plan.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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