401(k) plan termination


If you decide your 401(k) plan no longer suits your business, consult with your financial institution or benefits practitioner to determine if another type of retirement plan might be a better match. As a general rule, you can terminate your 401(k) plan at your discretion.

Full termination

A plan termination requires more than deciding to discontinue the plan

The IRS considers a 401(k) plan terminated only if:

  • The date of termination is established (this can take the form of a plan amendment, board of directors’ resolution, or complete discontinuance of contributions);
  • The benefits and liabilities under the plan are determined as of the date of plan termination; and
  • All assets are distributed as soon as administratively feasible, generally within one year after the date of plan termination.

A 401(k) plan that has not distributed its assets as soon as administratively feasible is considered an ongoing plan and must continue to meet the qualification requirements, including amending the plan document for law changes. If you maintain another plan, you may have to transfer employees’ elective deferral accounts to the other plan rather than distributing them to employees.

See Terminating a Retirement Plan for the required steps.

Generally, the process of terminating a 401(k) plan includes amending the plan document, distributing all assets, notifying employees, filing a final 5500-series form and possibly filing a Form 5310, Application for Determination for Terminating Plan PDF, to ask the IRS to make a determination on the plan's qualification status at the plan termination date.

Partial termination

Depending on the facts and circumstances, your plan may have a partial termination. This can happen if an action by the employer causes a significant decrease (generally at least 20%) in plan participation. Layoffs, plan amendments, or business reorganizations that cause a decrease in plan participation are counted even if they result from economic circumstances beyond the employer’s control. See the plan termination FAQs for more information.

COVID-19 relief for certain partial terminations: The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) changed how plan sponsors determine partial terminations during the pandemic. For a plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021, a plan will not have a partial termination if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

In response to Section 209 of the Relief Act, the IRS released five FAQs to help clarify how partial terminations are determined during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021.

100% vesting

All affected participants become fully vested in their account balances on the date of the full or partial plan termination, regardless of the plan’s vesting schedule.

  • Elective deferrals are always 100% vested.
  • Full vesting in a plan termination applies to employer nonelective contributions (such as profit-sharing contributions) and to matching contributions.

Full termination - Affected participants are current or former employees who haven’t received full payment of their vested interest by the plan termination date, unless they’ve incurred at least 5 consecutive 1-year breaks in service.

Partial termination - Affected participants are generally any employees who left employment for any reason during the plan year in which the partial termination occurred and who still have an account balance under the plan. Some plans wait until a participant has 5 consecutive 1-year breaks in service before the participant forfeits their nonvested account balance. For these plans, participants who left during the plan year of the partial termination and who have not had 5 consecutive 1-year breaks in service are affected participants. See IRC Section 411(d)(3) and Revenue Ruling 2007-43.

Additional resources