Your Small Business
Toolkits
Printing and Shipping
Take advantage of the Printing & Shipping Toolkit sponsored by FedEx to help grow your business.
A plan termination refers to the situation where a qualified retirement plan is discontinued.
Defined contribution plans. If you offered a defined contribution plan, such as a 401(k) plan, there isn't too much to worry about when the time comes to discontinue the plan. The plan administrator will see that each employee receives the proper amount in his or her account.
Defined benefit plans. Defined benefit plans, on the other hand, may cause you some concern because the rules are such that some of the benefits can be unfunded (in other words, someone is entitled to benefits but the money hasn't actually been paid to the plan yet). Therefore, the following rules concern only defined benefit plans.
Your defined benefit plans are supposed to be permanent. Generally, a plan that has been in operation for at least five years will be treated by the IRS as permanent. If you need to terminate your plan, you should have valid business reasons for doing so.
In some cases, the IRS will question whether a termination was for a valid business reason. If the IRS determines that the plan was never intended to be permanent, it may retroactively disqualify the plan, resulting in dire tax consequences to your business and to the participants.
Types of terminations. There are a few different types of terminations:
Excise taxes. There are also steep excise taxes that may apply if you discontinue a plan that is overfunded and hope to pull cash out of the plan to use for other purposes. If you are considering such a step, you'll need to consult a pension specialist who can help you determine whether this is actually possible in view of the potential tax liability.
Joining the U.S. Chamber of Commerce is an easy choice to make and an investment that begins to pay off right away.