Voluntary Plan Termination: What Is It?
An employer’s discontinuation of a defined benefit plan is known as voluntary plan termination. A company may cancel an existing plan since it is not legally compelled to provide its workers with a retirement plan.
Employers may, however, only end a voluntary plan if the plan administrator complies with all standards for a normal termination or distress termination. Voluntary plan terminations are covered by the U.S. Code of Federal Regulations, Section 4041.
Comprehending Termination of Voluntary Plans
The Internal Revenue Service (IRS) states that a company may discontinue its retirement plan since it is not legally compelled to provide one to its workers.
The following are some reasons why an employer may end a plan:
- A choice to abandon the plan
- If the company becomes insolvent,
- If another firm wants to buy the business or sell it to another company,
- If the company is moving to a different retirement plan,
The assets under a voluntary plan termination must be allocated to members in a way that complies with federal law. The employer may terminate or modify the retirement plan unilaterally at any time. The Employee Retirement Income Security Act of 1974 outlines this right.
The trustee or plan administrator is often in charge of allocating plan assets. The employer must distribute assets from a terminated plan as soon as administratively feasible after the plan’s termination. Affected members may often roll over the disbursed funds into another qualifying plan or individual retirement account (IRA).
According to the IRS, “The Pension Benefit Guaranty Corporation will guarantee the payment of vested pension benefits up to limits set by law for terminated defined benefit plans with insufficient funds to pay all of the benefits.”
Participants in terminated defined contribution plans (such as profit-sharing, 403(b), and 401(k)) often get their whole vested account balance back when the plan terminates.”
Form 6088, which reports distributable benefits, and an actuary’s certification of the amended funding goal percentage, both signed and dated, are required in the event of a defined benefit plan termination.
Termination of a Partial Plan
If more than 20% of plan members were laid off in a given year, the plan may be partly canceled. A significant business event, such as the closing of an office or unfavorable economic circumstances, may cause partial terminations.
According to the law, all impacted workers must be fully vested in their account balance as of the date of complete or partial plan termination.
Conclusion
- Employers are free to stop offering voluntary retirement plans to their employees because they are not required to do so by law.
- If an employer is considering bankruptcy, is taking part in a merger or acquisition, or is moving to a different plan, they may terminate the plan.
- When performing a voluntary plan termination, the plan administrator must adhere to Section 4041 of the U.S. Code of Federal Regulations.
- Typically, impacted members can transfer the disbursed funds to another eligible plan.
