Retirement Topics - Termination of Plan
Since employers are not required by law to provide retirement plans for employees, they can terminate a plan. An employer can terminate a plan for various reasons:
An employer voluntarily terminates the plan;
As part of a bankruptcy;
As part of a transaction where the business is sold to another company or purchases another company (merger); and
In order to switch to another type of retirement plan.
A plan can also suffer a partial termination if an employer closes a particular plant or division that results in the termination of employment of a substantial portion (usually 20% or more) of plan participants or in some defined benefit plans that stop or reduce future benefit accruals. Participants affected by the portion of the plan that undergoes partial termination have the same rights as those under a terminated plan.
Participant’s rights upon plan termination
Upon plan termination, participants must be immediately 100% vested in all accrued benefits
Distribution of assets by a terminating plan
Generally, an employer is required to distribute assets from a terminated plan as soon as it is administratively feasible, usually within one year after plan termination. Affected participants might be able to roll over the distributed benefits to another qualified plan or an IRA.
For terminated defined benefit plans with insufficient money to pay all of the benefits, Pension Benefit Guaranty Corporation will guarantee the payment of vested pension benefits up to the limits set by law.
For terminated defined contribution plans (for example, 401(k), profit-sharing or money purchase plans), participants generally receive the full amount of their vested benefits upon plan termination.