What Is Voluntary Plan Termination?
Let me explain voluntary plan termination directly: it's when an employer decides to discontinue a defined-benefit plan. You should know that since employers aren't legally required to provide retirement plans to employees, they can end an established one whenever they choose.
That said, you can't just terminate it haphazardly. The employer can only proceed if the plan administrator follows all the requirements for a standard or distress termination. This is all covered in Section 4041 of the U.S. Code of Federal Regulations, which deals specifically with voluntary plan terminations.
Key Takeaways
- Employers can terminate voluntary retirement plans because they're not legally required to provide them.
- Terminations might happen due to bankruptcy, mergers, acquisitions, or switching to another plan.
- Plan administrators must follow Section 4041 of the U.S. Code of Federal Regulations.
- Affected participants can usually roll over distributed funds to another qualified plan.
Understanding Voluntary Plan Termination
As per the IRS, employers aren't required by law to offer retirement plans, so they can terminate them. I want you to understand the reasons an employer might do this: it could be a straightforward decision to end the plan, or it might stem from the firm facing bankruptcy. Other times, it's because the business is being sold or bought by another company, or the employer is switching to a different retirement plan.
When a voluntary plan termination happens, assets must be distributed to participants according to federal law. Employers have the unilateral right to modify or end the plan at any time, as outlined in the Employee Retirement Income Security Act of 1974.
The plan administrator or trustee typically handles the allocation of assets. You need to know that employers must distribute these assets as soon as administratively feasible after termination. Participants like you can usually roll over the money to another qualified plan or an IRA.
The IRS notes that for terminated defined benefit plans short on funds, the Pension Benefit Guaranty Corporation guarantees vested pension benefits up to legal limits. For defined contribution plans, such as 401(k)s, 403(b)s, or profit-sharing plans, participants generally get their full vested account balance upon termination.
In a defined benefit plan termination, you have to submit Form 6088 for reporting distributable benefits, along with a signed actuary’s certification of the adjusted funding target percentage.
Partial Plan Termination
A partial plan termination can occur if more than 20% of participants are laid off in a given year. This might tie into major corporate events, like closing an office, or result from tough economic conditions.
The law mandates that all affected employees become fully vested in their account balances as of the termination date, whether it's full or partial.
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