Terminating a 401(k) Plan

• By law, 401(k) plans are begun "with the intention of being continued indefinitely," in the IRS's words. Still, a business can terminate its 401(k) plan if it needs to or, in some instances, it can a partially terminate a plan. Generally speaking, a partial termination happens when the employer does something that causes a significant drop-off in participation; say, if it lays off 20 percent of the workers. For a plan to be terminated, the IRS says the termination date has to be set, all benefits and liabilities have to be figured as of the date of termination and the assets need to be distributed as quickly as reasonably possible---generally within a year. Employee contributions are always fully vested (belong to the person) when they go in, but the company's contribution might vest over time. Everyone enrolled has to be fully vested so they get everything coming to them regardless of those rules.
  
  There are a lot of reasons for shutting down a 401(k) plan, The most common is when small companies cannot attract enough workers to make the plan feasible, according to Joanne Sammer, writing in "HRMagazine." But companies may also decide to end their plans if they are going out of business, merging (or being bought out) or moving off shore. When companies combine, they have the option of merging their 401(k) plans; they often have good reasons for terminating one plan and moving everyone into the remaining one, instead.
  
  Before closing out a plan, the company needs to review the plan documents to be certain all the necessary updates have been added and that contributions were made on a timely basis. Perhaps the biggest problem facing a company is to make sure all the former employees who have stayed in the plan are notified. Tracking people down who left the company years earlier can be a time consuming process, but it is the company's responsibility to get its paperwork in and give them what they are owed.
  
  

Check with the IRS

• To be sure it is complying with the rules, a company can ask the IRS for a determination letter. If it does, it is required to give notice to anyone vested in the plan, including former employees and the beneficiaries of plan members who have died, between 10 and 24 days before making applying for the determination.