Voluntary Plan Termination

Voluntary Plan Termination: What it Is and How It Works

Key takeaways
* Voluntary plan termination is an employer’s decision to end a defined-benefit or defined-contribution retirement plan.
Employers must follow federal rules (ERISA-related regulations) and specific termination procedures administered by the plan administrator or trustee.
Plan assets must be distributed as soon as administratively feasible; participants may roll distributions into another qualified plan or an IRA.
For terminated defined-benefit plans with insufficient assets, the Pension Benefit Guaranty Corporation (PBGC) may guarantee vested benefits up to legal limits. For defined-contribution plans, participants generally receive their full vested account balances.
A partial termination (commonly triggered when a large share of participants is laid off) requires immediate vesting for affected employees.

What voluntary plan termination means
A voluntary plan termination occurs when an employer elects to end a retirement plan. Employers aren’t legally required to maintain a retirement plan, so they may terminate one for business reasons, provided they follow federal termination procedures and protections for participants.

Common reasons employers terminate a plan
* Business closure or bankruptcy.
Corporate transactions such as mergers, acquisitions, or sales.
Switching to a different type of retirement arrangement.
* A strategic decision to end the plan.

Legal framework and administrator responsibilities
* Federal law (ERISA-related regulations) governs plan termination procedures; plan administrators and trustees must comply with those rules.
The plan sponsor or administrator must allocate and distribute plan assets in accordance with the law and the plan document.
Distributions should occur “as soon as administratively feasible” after termination.
* For defined-benefit plan terminations, actuarial and reporting requirements apply (including filing the required termination reports and an actuary’s certification of adjusted funding targets). Administrators typically use the prescribed PBGC reporting forms for these filings.

How distributions work
* Defined-contribution plans (e.g., 401(k), 403(b), profit-sharing): participants generally receive their full vested account balances upon termination and may roll them into another employer plan or an IRA.
* Defined-benefit plans: benefits are paid according to plan terms. If the plan lacks sufficient assets, the PBGC may guarantee payment of vested pension benefits up to statutory limits. Participants may receive lump-sum or annuity distributions depending on the plan’s termination method and funding.

Participant options and protections
* Rollovers: distributed amounts from terminated plans can typically be rolled over into another qualified plan or an individual retirement account (IRA) to preserve tax deferral.
Vesting: the law requires full vesting for affected employees in the event of a full or partial termination.
PBGC protection: for many defined-benefit plans, PBGC provides a safety net for vested benefits if the plan is underfunded at termination (subject to legal limits).

Partial termination
* A partial termination can occur when a significant portion of plan participants (commonly defined as more than 20% in a year) leave due to layoffs or a corporate event.
* When a partial termination is deemed to have occurred, affected employees must become fully vested in their accrued benefits as of the termination date.

Practical steps for employers and participants
For employers/administrators:
* Review the plan document and applicable federal rules on termination.
Notify participants and beneficiaries about the termination and distribution options.
Work with plan counsel, actuaries, and the PBGC (if applicable) to complete required filings and actuarial certifications.
* Distribute assets promptly and document all actions taken.

For participants:
* Review communications from the plan administrator about distribution options and timing.
Consider rolling distributions into an IRA or a new employer plan to maintain tax deferral and investment continuity.
Confirm your vested status and, if applicable, whether PBGC coverage applies to your benefits.

Conclusion
Voluntary plan termination is an employer’s lawful option but must be carried out under defined federal procedures to protect participants’ benefits. Understanding the differences between defined-contribution and defined-benefit terminations, participant rights (including rollovers and vesting), and required filings helps both employers and participants manage the process and preserve retirement assets.