Small Employer Retirement Plans During Economic Downturns

 

Contributions and benefits for terminated employees

Reduce employer contributions: Discretionary profit-sharing contributions can be reduced or eliminated without amending the plan document. Certain 401(k) plans may require a level of employer contributions to satisfy nondiscrimination testing, but plan provisions may be amended to reduce employer contributions while still allowing employees to make contributions.

Defined benefit plan sponsors that are unable to make required contributions may be subject to an excise tax. See PBGC for more information on reporting and disclosure requirements.  Benefit accruals in a defined benefit plan can be frozen with a plan amendment, on a prospective basis, to reduce funding requirements.

Qualified plans: For plan participants who terminated employment before the end of the plan year, your plan document determines if they receive a contribution or benefit accrual for the plan year. Most plan benefits are based on hours of service worked during the plan year, not on being employed on the last day of the plan year. See your plan document for more information.

IRA-based plans: Plan contributions in SEPs, SIMPLE IRAs and SARSEPs must be made for all employees that meet the plan’s eligibility requirements, even those who terminate employment or die before the end of the plan year.

Plan terminations

An employer isn’t required to have a retirement plan for its employees and may terminate their plan for various reasons. If you decide to terminate your retirement plan, all participants in the plan become 100% vested in any non-vested account balances or accrued benefits.

Terminate a qualified plan: Even though a qualified plan must be set up with the intention of continuing indefinitely, you may terminate your plan when it no longer fits your business needs. A qualified plan, like a 401(k) plan, requires you to take a number of steps to terminate the plan and you may want to contact your retirement plan professional to help with the termination process.

A defined benefit plan has other requirements in addition to the normal steps to terminate a plan. Contact your actuary and retirement plan professional to help with the termination process.

  • Standard Terminations: Rules and requirements for standard termination of a fully funded pension plan, including notices, filings, distributions and audits.
  • Distress Terminations: Requirements for a distress termination of an underfunded pension plan, including the process to follow, required notices and other necessary filings.

Terminate an IRA-based plan: Accounts in IRA-based plans are always 100% vested and are controlled by the plan participants. There are no forms to file with the IRS or distributions to make to the participants.

  • SEP IRA plan: Notify the SEP-IRA financial institution that you’ll no longer be making contributions and that you want to terminate the agreement. You should also notify your employees that you’re discontinuing the plan.
  • SIMPLE IRA plan: Other than the first year, SIMPLE IRA plans must be maintained for the entire calendar year. You must notify your employees before November 2 that you’re discontinuing the SIMPLE IRA for the coming year.
  • Payroll Deduction IRA: Notify your payroll service that you’re no longer making the payroll deductions available and you want to terminate the agreement. You should also notify your employees that you’re discontinuing the plan.
  • SARSEP IRA: Notify the SARSEP financial institution that you will no longer be making contributions and that you want to terminate the agreement. You must also notify your employees that you’re discontinuing the SARSEP.

Partial plan termination

Your plan can have a partial termination if a substantial portion (at least 20%) of your employees are laid off, furloughed or otherwise terminated. Determining if your plan had a partial termination is a facts and circumstances test. It’s not a bright-line test.

A plan can suffer a partial termination if an employer terminates at least 20% of plan participants during a plan year. If you determine your plan has a partial termination, all affected participants must be 100% vested in all accrued benefits. See partial terminations and related FAQs for more information. Plans, such as IRA-based plans that are always 100% vested, are not affected by a partial termination.

Tracking participants who left employment

It’s important to keep track of participants who leave employment during the year. If you’re terminating your plan or just trying to make distributions to terminated employees, it may take several months or longer to finalize those distributions. You want to avoid having missing participants that you’re unable to locate when you’re ready to make distributions.