Employee Plans Compliance Unit (EPCU) - Completed Projects - Project with Summary Reports – Termination Project
Termination Project Overview
- Adopted a resolution to terminate the plan,
- Did not mark their return as the ‘final return/report’,
- Had not filed a subsequent year return marked the ‘final return/report’, and
- Still had plan assets at the end of the plan year on the last return filed.
We wanted to learn why those plan sponsors did not file a final Form 5500 showing zero assets at the end of the plan year. In general, a plan sponsor must continue to file a Form 5500 series return for a terminated plan until a Form 5500 marked the ‘final return/report’ showing zero assets at the end of that plan year is filed.
We asked plan sponsors for information about their terminated plans to learn whether they are complying with their annual reporting and plan qualification requirements.
The responses showed that although most of the plan sponsors in the sample took additional steps to terminate their plan beyond adopting a resolution to terminate, they did not always complete the termination process. Over 75% of the sampled sponsors made errors as part of terminating their plan.
Responses showed plan sponsors made these types of errors as part of their termination process:
- Did not file a final Form 5500 series return.
- Some sponsors did not file their final annual return marked as the ‘final return/report’ showing zero assets at the end of the plan year. They either forgot or were unaware of the requirement.
- Some sponsors missed filing their annual return for one or more years while their plan was terminating. Being in the process of terminating does not eliminate the Form 5500 series filing requirement.
- Did not actually terminate their plan. Some plan sponsors said they marked the box on line 5a of Schedule H (Financial Information) or Schedule I (Financial Information – Small Plan) incorrectly on the Form 5500 series return indicating they had adopted a resolution to terminate their plan when they had not.
- Mistakenly indicated the plan terminated when it was frozen. A frozen plan is not a terminated plan. In a frozen plan, participants will not accrue any additional benefit (whether because of service or compensation) except under special circumstances. A frozen plan must continue to meet annual information reporting and plan qualification requirements including having the plan sponsor make timely amendments for current law; otherwise, the plan may lose its qualified status for tax benefits.
- Mistakenly used the same plan number from a previous or different plan. Once plan sponsors use a plan number, they should continue to use it for that plan on all future filings with IRS, Department of Labor (DOL) and Pension Benefit Guaranty Corporation (PBGC). Even if the plan sponsor terminated the first plan that used that plan number, the sponsor should not use that plan number again for any other plan.
- Distributed all plan assets but did not mark the Form 5500 series return to show it was the final return. These sponsors filed amended returns to correct the prior filing.
- Distributed all plan assets but did not indicate zero assets at the end of the plan year. These sponsors filed amended returns to correct the prior filing.
- Did not distribute all plan assets as soon as administratively feasible after adopting the amendment to terminate their plan. If there were form or operational defects the sponsor needed to correct, the EPCU requested plan sponsors enter the EP voluntary correction program (VCP). Since a compliance check is not an examination, sponsors can still correct certain form and operational mistakes by using the Employee Plans Compliance Resolution System (EPCRS).
The reasons for these errors were as follows:
- Taking a much longer time to distribute plan assets because of difficulty locating participants and/or beneficiaries. Many plan sponsors were not aware of the requirements and procedures for locating missing participants and beneficiaries. With the issuance of Revenue Procedure 2012-35, the IRS stopped providing letter-forwarding services and plan sponsors should instead rely on DOL Field Assistance Bulletin 2004-2 for guidance in locating missing individuals.
- Difficulty distributing certain types of plan assets, such as real estate or partnership investments.
- Not aware all plan assets must be distributed for the plan termination to be complete.
- Not aware of the differences between a frozen plan and a terminated plan.
- Not aware there were still assets in the trust.
- Processing errors that occurred before the implementation of the DOL electronic filing system (EFAST).
The EPCU designed the project to learn whether there is compliance regarding plans in which:
- Sponsors adopted a resolution to terminate the plan,
- There was no record of a final Form 5500 series return filed, and
- There were still plan assets at the end of the plan year on the last return filed.
The information from this project helps Employee Plans have a better understanding of the qualified plan sector and assists with development of tools, guidance and enforcement efforts.
The project goals were to determine if plan sponsors who indicated they had adopted a resolution to terminate their plan:
- Completed the termination process,
- Were in compliance with Revenue Ruling 89-87 regarding wasting trusts,
- Filed a final Form 5500 series return, and
- Distributed all trust assets, or
- Had processing errors of their Form 5500 series return.
As long as a qualified retirement plan and related trust are in existence, the plan sponsor needs to take certain actions in order to keep the plan qualified. These actions include ensuring that the plan complies with all of the plan qualification requirements of Internal Revenue Code section 401(a) and related Regulations.
Plan sponsors must continue to comply with the annual information reporting and plan qualification requirements until they:
- Terminate the plan,
- Distribute all trust assets, and
- File a final Form 5500 series return.
If there is noncompliance, then the potential exists for plan disqualification, discrimination in favor of highly compensated employees, abusive tax avoidance and administrative penalties.
Plan sponsors must distribute all plan assets as soon as administratively feasible after the date of termination. Generally, a distribution which is not completed within one year following the date of plan termination specified by the employer will be presumed not to have been made as soon as administratively feasible unless facts and circumstances show otherwise (Rev. Rul. 89-87). If all assets are not distributed as soon as administratively feasible, based upon the facts and circumstances of the particular case, the plan is considered an ongoing plan and must meet the requirements of IRC section 401(a) in order to continue its qualified status.
When all plan assets are distributed, the sponsor must file a final Form 5500 series return. This is required even if the sponsor was exempt from filing a Form 5500-EZ (the annual return of a one-participant retirement plan) in previous years.