Retirement Plans FAQs regarding Plan Terminations


An employer can terminate a plan for various reasons including bankruptcy, merger or simply voluntarily terminating it. See also

These FAQs provide general information and shouldn’t be cited as legal authority.


My company terminated our plan. Is this allowed?

Employers are not required by law to provide retirement plans for employees and may terminate a plan if certain requirements are met, such as required notifications to plan participants and interested parties.

Will I lose a portion of my retirement funds if I’m not fully vested in my retirement account when my plan is terminated?

You should not lose any of your account. When a plan terminates, the accrued benefits of all affected employees must become 100% vested (Internal Revenue Code Section 411(d)(3)).

Why is the IRS holding the money from my retirement plan now that the plan has terminated?

The IRS does not maintain or hold the assets during the plan termination process. When a plan has formally terminated and the plan sponsor has submitted a Form 5310, Application for Determination for Terminating Plan PDF, the IRS will review the application. Many times, we ask for additional information before we issue a favorable letter, and the review process may last for several months. The employer or trustee is not required to hold the assets until we issue a favorable determination letter but usually will do so to ensure that plan distributions will receive the favorable tax treatment given to distributions from qualified plans.


What steps should we take to terminate our plan?

Generally, you should take specific actions when you terminate a plan, including providing required notices to plan participants, amending the plan document, distributing assets and, if you wish, filing a Form 5310 with the IRS. See Terminating a Retirement Plan for more information.

When must plan assets be distributed after a plan terminates?

Generally, an employer must distribute assets from a terminated plan as soon as administratively feasible after the date of plan termination.

We determine whether the employer made distributions as soon as administratively feasible based on the facts and circumstances, but generally the IRS views this to mean within one year after plan termination.

What if the assets were not distributed as soon as administratively feasible?

A plan that has not distributed assets as soon as administratively feasible is considered an ongoing plan and must continue to meet the qualification requirements of IRC Section 401(a) and the minimum funding requirements of IRC Section 412 (if applicable).

Our terminating profit-sharing plan does not offer an annuity option as a distribution method. How do we distribute the assets?

A terminating plan that does not offer an annuity option as a distribution method may make distributions according to each participant’s account balance, even if the amount exceeds the involuntary cash-out limit in the plan. This rule does not apply if the employer, or a controlled group of the employer, maintains another defined contribution plan.

What type of notice must be provided to participants prior to a distribution?

  • Participants must receive notice of their election rights on the distributions to be made from the terminated plan 30-180 days before the date of distribution;
  • Notices should be delivered only when it’s reasonable to expect a distribution can be made within the next 180 days; and
  • In some cases, a participant may waive the minimum 30-day notice period.

Can we still file a determination letter application if we’ve distributed all the assets?

Yes, you can generally still file a determination letter application after substantially all the plan assets are distributed.

The general date for submitting your application is the later of:

  1. one year from the effective date of the termination, or
  2. one year from the date on which the action terminating the plan is adopted.

However, the application cannot be filed later than 12 months after the date that substantially all plan assets are distributed in connection with the plan termination.

Must we amend our terminating plan to comply with law changes?

A terminating plan must be amended for all current law that applies to the plan and takes effect as of the date of termination. This is true even if the plan would not otherwise be required to amend the plan by that date based on the plan’s remedial amendment cycle.

When must we notify our employees that we intend to apply for a determination letter for the terminating plan?

The notice must be provided between 10 and 24 days before you submit your application to the IRS for a determination letter.

Is there a difference in how defined contribution plans and defined benefit plans are terminated?

Defined benefit plans covered by Title IV of ERISA must meet additional requirements under rules administered by the Pension Benefit Guaranty Corporation (PBGC), including forms and notices to participants relating to plan funding and the form of benefits to be paid. See the PBGC Plan Terminations page.

We haven’t made many contributions to our profit-sharing plan. How will this impact our plan termination?

Although employers are not required to contribute every year to a profit-sharing plan, contributions must be recurring and substantial. If the amount is not significant enough to show an intention to continue the plan, the IRS will treat the contributions as discontinued.

A plan is treated as terminated for vesting purposes if the employer completely discontinues contributions. The employees affected by the discontinuance must become 100% vested. Generally, you must vest all affected employees no later than the end of the taxable year following the taxable year in which you made your last substantial contribution (IRC Section 411(d)(3)).

The IRS presumes that an employer has completely discontinued contributions when the employer fails to make substantial contributions for at least 3 years in a 5-year period. If this happens, the burden shifts to the employer to show that a complete discontinuance has not occurred (Announcement 94-101).