Since an employer isn’t required by law to provide a retirement plan for employees, it can terminate its retirement plan. An employer can terminate a plan for various reasons:
As a result of a voluntary decision to terminate 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)
In order to switch to another type of retirement plan
A plan can 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 if a defined benefit plan stops or reduces future benefit accruals. Participants affected by the portion of the plan that undergoes partial termination have the same rights as those in a terminated plan.
Participant’s rights upon plan termination
Upon plan termination, participants must be immediately 100% vested in all accrued benefits. In a 401(k) plan, for example, this means that employer matching and profit-sharing contributions must become fully vested regardless of the vesting schedule in the plan document.
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 can generally roll over the distributed money to another qualified plan or IRA.
For terminated defined benefit plans with insufficient money to pay all of the benefits, the Pension Benefit Guaranty Corporation will guarantee the payment of vested pension benefits up to limits set by law.
For terminated defined contribution plans (for example, 401(k), 403(b) or profit-sharing), participants generally receive the full amount of their vested account balance upon plan termination.