401(k) Plan Termination

Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 13, 2023

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:

  • The date of termination is established (this can take the form of a plan amendment, liabilities' resolution, or complete discontinuance of contributions);
  • The benefits and liabilities under the plan are determined as of the date of plan termination; and
  • All assets are distributed as soon as administratively feasible, generally within one year after the date of plan termination.

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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."

Reasons for 401(k) Termination

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.

401(k) Plan Termination FAQs

About the Author

True Tamplin, BSc, CEPF®

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.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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