| Question 45: What are the proper legal and other steps required to terminate a 401(k) Plan?
Answer: The termination of a 401(k) plan is a technical matter that always should involve the plan's legal advisors. The following termination checklist (for a single employer plan) does not contain all of the potential issues that may arise in connection with a plan termination, but the primary actions to consider are:
Resolutions. The plan sponsor must adopt resolutions to terminate the plan. The resolutions often contain an internal checklist of the details for implementing the termination, such as authorizing 100% vesting of plan participants and directing a designee to provide proper notice of the termination to employees, trustees and service providers.
GUST Amendments. The plan must be amended to comply with the "GUST" legislative changes. Although the GUST remedial amendment period does not require such an amendment until the end of the 2001 plan year (the deadline for most ongoing plans), a terminating plan must be in compliance upon termination. The resolutions discussed above usually adopt the necessary GUST amendments or delegate adoption authority.
IRS Determination Letter. The plan should seek a favorable determination letter from the IRS regarding the final terms of the plan. This letter is not required, but it is almost always obtained. The letter not only provides future audit protection as to the form of the plan, but it also serves to protect distributions that are rolled over into another qualified plan or IRA. Accordingly, the resolutions discussed above often condition all termination-related distributions on the receipt of a favorable IRS determination letter. The resolutions also might direct a designee to apply for the letter on behalf of the plan sponsor.
Ongoing Administration. The plan sponsor should coordinate with service-providers to ensure that the plan is properly administered from the time termination resolutions are adopted until the assets of the plan are finally distributed. This includes the filing of a final Form 5500 within 210 days after such final distribution.
Additional information about terminating a 401(k) plan can be found in Outline Section X.C ("Distribution Upon Plan Termination") of the 401(k) Plans reference manual published by the Employee Benefits Institute of America LLC (EBIA).
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