EPCU Project Finds Plan Sponsors Don’t Complete All Steps in Termination Process
The Employee Plans Compliance Unit (EPCU) looked at whether plan sponsors completed all the necessary steps after filing a Form 5500-series return showing they had adopted a resolution to terminate the plan.
We designed the Termination Project to learn if sponsors who indicated they adopted a resolution to terminate their plan:
- Completed the termination process,
- Complied with Revenue Ruling 89-87 for their wasting trusts,
- Filed a final Form 5500-series return, and
- Distributed all trust assets as soon as administratively feasible.
The EPCU discovered that some plan sponsors who indicated they had adopted a resolution to terminate their plan didn’t file a final Form 5500-series return. In general, plan sponsors must continue to file a Form 5500-series return for their terminated plan until the last return filed is marked “final return/report” and shows zero assets at the end of that plan year. 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.
Over 75% of the sampled sponsors showed that, although they took additional steps to terminate their plan beyond adopting a resolution to terminate, they didn’t complete the termination process.
- Didn’t file a Form 5500-series return marked as the ‘final return/report’ showing zero assets at the end of the plan year
Being in the process of terminating doesn’t eliminate the Form 5500-series filing requirement. Sponsors must continue filing their annual return until all plan assets are distributed.
- Distributed all plan assets but didn’t mark the Form 5500-series return as final
Sponsors can correct this by filing an amended return. Review your Form 5500 return carefully before filing to prevent errors.
- Terminated the plan but weren’t aware there were still assets in the trust
All plan assets need to be distributed for the plan termination to be complete.
- Took a long time to distribute plan assets because of difficulty locating participants and beneficiaries
Many plan sponsors weren’t aware of the requirements and procedures for locating missing participants and beneficiaries. Plan sponsors may use the Department of Labor’s Field Assistance Bulletin 2004-2 for guidance in locating missing individuals for benefit distributions. The IRS no longer provides letter-forwarding services (Revenue Procedure 2012-35).
- Distributed all plan assets but didn’t indicate zero assets at the end of the plan year on their final Form 5500 series return
Sponsors can correct this by filing an amended return.
- Didn’t distribute all plan assets as soon as administratively feasible after the plan termination date
Some plan sponsors had difficulty distributing certain types of plan assets, such as real estate or partnership investments. Generally, a distribution which isn’t completed within one year following the date of plan termination will be presumed not to have been made as soon as administratively feasible unless facts and circumstances show otherwise (Revenue Ruling 89-87, 1989-2, C.B. 81). If sponsors don’t distribute all plan assets as soon as administratively feasible, the IRS considers the plan to be ongoing.
If sponsors don’t complete all termination actions, there is potential for plan disqualification, discrimination in favor of highly compensated employees, abusive tax avoidance, and administrative penalties.
Other filing errors
- Didn’t actually terminate their plan
Some plan sponsors incorrectly marked line 5a on the Schedule H (Financial Information) or Schedule I (Financial Information – Small Plan) of their Form 5500-series return to indicate they had adopted a resolution to terminate the plan.
- Mistakenly indicated the plan terminated when it was frozen
These sponsors weren’t aware of the differences between a frozen plan and a terminated plan. In a frozen plan, participants don’t accrue any additional benefits (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 amend the plan for current law by the required deadlines; 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, DOL and PBGC. Even if the plan sponsor terminated their plan, they can’t use the same plan number for any other plan.
- Processing errors that occurred before the implementation of the DOL electronic filing system
Plan sponsors now must file Forms 5500 and 5500-SF electronically using DOL's EFAST2 web-based filing system or through an EFAST2 approved vendor. Plan sponsors paper file the Form 5500-EZ with the IRS. Plan sponsors can’t paper file Forms 5500 or 5500-SF. For more information, see DOL's EFAST2 website or the IRS Form 5500 corner.
Review your terminated plan to see if you’ve finished all the steps in the termination process including:
- Filing all current and prior Form 5500-series filings
- Filing a final Form 5500-series return showing zero assets
- Distributing all assets
- Finding all missing participants and beneficiaries
You should also recognize the differences between active, frozen, and terminated plans.
You should correct any errors you discover and amend your return, if needed. Correct your plan administrative procedures so the mistakes don’t happen again. It may be helpful to ask at least two people to review your 5500 return before you file it.
If you have questions about this project, email us and include “Termination project” in the subject line. We regret that we cannot respond to technical questions unrelated to the compliance project.