In this post, we address many of the termination questions we receive. Please review the questions below.

What is the termination fee?

The fee to terminate a defined benefit plan is $1,250. Plus, there is an employee distribution fee of $275 per participant. These fees cover all the plan paperwork, assisting with the funds transfer, and processing all final IRS and Department of Labor reporting.

How does vesting work for plan participants?

When you terminate a plan, all participants become 100% vested. As such, funds in the defined benefit plan can be transferred or rolled over into individual IRA accounts or to other qualified plans.

I want to terminate the plan for the current year, but I also want to fund for this year. What’s the deadline to terminate the plan?

If you want to fund the plan for the termination year, you will generally need to meet the 1,000-hour requirement. So, you would generally not want to terminate the plan until after June 30th or when you have met the 1,000-hour requirement.

The deadline to terminate the plan is November 1st for a calendar year plan in order to avoid extra processing fees. The November 1st deadline gives us time to process the paperwork and get your funds out by the end of the year.

If you need to terminate the plan for the current year, but do not make the November 1st deadline, there is a $500 expediated surcharge.

I want to fund the plan for the current year and I DO NOT want to fund for this year. What’s the deadline to terminate the plan?

If you don’t want to fund a plan for the current year, then you need to terminate the plan before you meet the 1,000-hour requirement. This would generally be about halfway through the year or June 30th. That would give you technically six months to get the money distributed out of the account.

What is the deadline to make distributions?

You must get all the funds out before the end of the plan year. In most situations, this is December 31st.

I want to terminate the plan for the current year, but I won’t be able to get the funds out until next year. How does that work?

If your plan is terminated and you are not able to get the funds out until the following year, you will not have to pay actuary fees for the subsequent year. However, you will be required to file Form 5500 for the subsequent year and be subject to our normal 5500 filing fees.

I understand that a defined benefit plan is a “permanent” plan. But is there a problem if I want to terminate the plan within 3 or 5 years of set up?

The IRS states these plans should be open for at least several years. But they don’t define what “several” means, and they have not given an exact timeline.

The goal was that these plans were set up with long-term intent. But if situations occur where a plan is being terminated, you should have a reasonable cause.

We rarely seen the IRS challenge a plan regarding long-term intent. But in theory it can happen. It is certainly something you would want to consider. When it comes to the IRS, we cannot offer any guarantees.