Because of the layoffs sparked by the current recession, many managers have been compelled to look into what their companies should know about 401k partial termination.
By law, if there is a partial termination of a qualified plan, the plan sponsor must give ALL effected participants the benefits that they have accrued under the plan.
Failure to do so could disqualify the plan and result in significant costs to the employer –
Not to mention possible lawsuits by plan participants who are forced to prematurely recognize income due to the plan’s disqualification.
What Will Cause A 401K Partial Termination?
The Internal Revenue Service (IRS) considers that a 401k partial termination has occurred if at least 20 percent of participants lose coverage.
Applicable major events may include such scenarios as bankruptcies, mergers and acquisitions; an amendment to a plan that curtails coverage; the severance of a previously covered group of workers; the closing of plants or divisions; or major corporate restructuring.
Multiple separate events may be aggregated for the purpose of determining whether a 401k partial termination has occurred.
This applies when the events are related, meaning that they sprang from the same so-called “major corporate event.”
Who Can Distribute The Benefits?
In case there is a termination, participants often find it difficult to access benefits that they have earned and, in many cases, have no one to contact with their questions and concerns.
While custodians, such as banks, insurers, and mutual fund companies, hold the assets of these plans, they are NOT authorized to terminate the plans and distribute the assets.
In response to this, the Department of Labor has issued rules to initiate a voluntary process for the custodian to wind up the plan’s business – so that benefits may be distributed accordingly and the plan terminated.
Who Are the Parties Involved?
Due process requires the employer to request the IRS to ascertain whether an intended 401k partial termination will have an effect on the plan’s qualified status.
All interested parties will be informed of this request.
A crucial point that an employer should know is that interested parties in a plan termination generally include:
- All present employees with accrued benefits under the plan
- All past employees with vested benefits under the plan
- All beneficiaries of deceased former employees who are currently receiving benefits under the plan.
An employer who sees his company going out of business should make proper arrangements so that a plan officer remains responsible for the payment of benefits and other plan business.
In most situations, there are two things most employers should keep in mind with regard to 401k partial termination:
- Always consider partial termination whenever planning to sell the company or a part of it, including downsizing, and plan accordingly.
- Determine if it will make good business sense to submit the plan to the IRS for a ruling as to whether a partial termination will occur.
Employers should familiarize themselves with the options and resources available when faced with a plan termination. RCP Solutions and their team of consultants lend over 60 years of experience and expertise to addressing these complex issues. Contact us today to find out how RCP can help.
Would you like more information? Contact a RCP Solutions expert.
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