Defined Benefit Plan Termination Process

Here is an outline of the termination process: 

  1. Submit our Termination Form when you know you are ready to move forward with the termination., 
  2. Invoice – Once received, we will review and send an invoice for the termination fee and final year of annual administration. Fee Schedule
  3. Signature Pages – Upon receiving payment we will send out the termination documents for signature.
    • This will amend the plan to establish a termination date and update the plan for all changes in the law or plan qualification requirements effective on the plan’s termination date.
  4. Complete Previous years Annual Administration – If you have not completed annual administration for the plan year 2022, we would need to complete this before moving forward with any of the remaining steps. 
  5. Final Actuarial Review – Before the cash balance plan can be closed we need to have the actuaries calculate any final contributions that may be required to be deposited before closing the accounts. We will need:
    • The plan’s asset value as of the termination date
    • Expected W2s or Net income for the final plan year
      • if the plan is underfunded, the plan will need to be funded to level out the asset balance. 
      • If the plan is overfunded, we will need to discuss strategies to avoid your plan incurring any penalties. 
      • Here is an article we have written on terminating cash balance/defined benefit plans.  
  6. Final Funding – Once funding amounts are provided the next step is to make any additional contributions before 12/1.
  7. Coordinating Rollovers – At the latest we would use the month of December to rollout the cash balance assets before 12/31. If the account(s) is not completely empty by the end of the year, an additional 5500 and actuarial valuation would be needed for the following year. We want to help you avoid this.
    •  If there are multiple participants we will provide the distribution amount for each of them. 
    • The assets can be rolled into an existing IRA, or a new IRA can be established. Each participant will need their own account to receive the funds. 
    • There is an option to distribute assets directly to an individual. Please note if the participant is younger than 59 1/2, they will receive a 10% tax for early distribution in addition to their normal income tax. 
  8. Issue 1099-Rs – The 1099-R will report the rollover from the cash balance plan to an IRA or other retirement account which is a non-taxable event. These are issued in January 2024, or the year following the terminating year.
  9. Complete final annual administration for the plan year 2022; file final form 5500EZ by March of 2024.
  10. Final Reports – the final actuarial valuation and 5500s should be kept in your records for a period of time. 

If you have any questions or concerns, please let me know. 

Emparion, LLC does not provide legal, investment or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact financial results. Emparion cannot guarantee that the information herein is accurate, complete, or timely. Emparion makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Please consult an attorney or tax professional regarding your specific situation.