401k Termination Distribution

Do you need advice on 401k termination distribution?

If your company offers a 401k plan to its employees, but finds that it has to terminate that plan for any reason, then you should know what to expect from the termination and distribution processes.

Regardless of whether your decision to close a 401k account only affects a single employee or everyone in the company, it isn’t as simple as stopping sponsorship of the plan and sending funds to participants.

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In order to protect the retirement prospects of participants and minimize any exposure to risk that your company may face, you need to follow certain regulations that have been put in place to oversee the termination of 401k plans and the distribution of funds associated with them.

While these rules can make navigating the process of 401k termination distribution time consuming and more involved than you might expect, their necessity cannot be stressed enough.

In order to avoid the consequences of mismanaging the termination and distribution processes, you need to:

  • Be sure that termination of the plan is within your power – If you have the ability to initiate a termination, then you want to get the process started. Following that, you want to establish a termination date for the plan.

You don’t want the termination date to be too unrealistic or aggressive because you will need to be sure that everything will be correct down to the smallest detail. You also want to leave plenty of time to completely deal with any special aspects of the plans that you intend on terminating.

  • Ensure that program participants are informed of the plan’s termination – This includes current employees as well as past employees. It isn’t uncommon for you to have a difficult time finding missing participants, like former employees with whom you know longer have contact, but rules set forth by the US Department of Labor require you to do everything in your power to locate these individuals.
  • Give program participants options about distribution – During this step of the 401k termination distribution process, your employees can determine how they wish to receive the funds they have accumulated.

You want to do this as quickly as your organization can manage. Typically, this means distributing the funds to all program participants, or their beneficiaries, within a year of the day that the plan has been terminated.

These three steps are just the foundation of the termination distribution process. There may be circumstances that are unique to your particular organization that you will have to keep in mind in addition to the standard practices.

Regardless of your situation, you want to make sure that you are aware of all of the rules that are setup to govern termination distribution.

With all of the steps involved, the last thing you need is to be penalized for missing a rule.

How Distributions Work

Whatever the purpose behind ending a 401k plan might be, your ultimate goal is to make sure that the money gathered into the accounts is distributed to either the participants or their beneficiaries, so it would be worth your while to know just how you can distribute that money.

  • Cash – Or, more specifically, a check that provides a lump payment. If a participant chooses this as his or her payment at the end of a 401k termination distribution, they will have to pay taxes on the withdrawal due to federal rules related to early withdrawal.

Still, this form allows the recipient to do what he or she wishes to with the money once they receive it.

  • Transfer – If a participant wishes to continue with investments and retirement savings following the termination of a 401k plan, then the money can be transferred into a traditional IRA account or the 401k account of another employer.

They will not have access to cash but, at the same time, they will not incur penalties for early withdrawal.

Helping participants determine which option is in their best interest is another part of conducting a 401k termination distribution process that you’ll have to undertake.

Doing that can often take time, resources, and expertise that you may not have.

It is important to remember that what you are realistically able to accomplish relies in part on the size of your company.

If you run a small, medium or large operation, you may not have the resources or manpower to fully carry out a well planned and executed 401k distribution.

If that is the case, then you need the help of professionals who can dedicate the time and resources necessary to carry out a thorough investigation concerning the best way to approach the termination of a 401k plan.

You need RCP Solutions.

How We Can Help

As specialists in risk management and retirement compliance, we can help you with your 401k termination distribution plans by making sure that your practices are in compliance with IRS and Department of Labor regulations.

We can also help your company find missing participants and ensure that account balances are up to date. We can also help you make sure that any plans you create are amended for changes in legislation that may occur prior to the plan’s termination date.

We will oversee your company’s termination distribution plans while you focus your resources on your company’s operations.

If you want to speak with a representative and get started on 401k termination distribution today, then click here or call us at

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