Terminating a retirement plan is complicated. The importance of having a well thought out plan in place before beginning the plan termination process is imperative because making mistakes can be costly.
To better understand why plan sponsors were making mistakes in qualified plan terminations, the IRS Employee Plans Compliance Unit conducted a “Termination Project” in 2011. Over 75% of the sampled sponsors made errors!
So what kind of errors did plan sponsors make?
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Did not file a final Form 5500 series return
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Did not actually terminate their plan
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Mistakenly indicated the plan was terminated when it was frozen
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Mistakenly used the same plan number from a previous or different plan
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Distributed all plan assets but didn’t mark the final Form 5500 series to show it was the final return
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Distributed all plan assets but did not indicate zero assets at the end of the plan year
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Did not distribute all plan assets as soon as administratively feasible (*generally within 12 months)
Why did plan sponsors make these errors?
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Length of time required to find missing participants
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Difficulty in distributing certain types of plan assets (real estate or partnership investments)
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Not aware all plan assets must be distributed
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Not aware of the difference between a frozen and terminated plan
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Not aware there were still assets in the trust
For more information on the “Termination Project” conducted by the IRS Employee Plans Compliance Unit click on the link – (IRS Termination Report).
This is the second video of a three-part series on DC plan terminations, presented by Mike Wilder, Vice President of Client Services, Retirement Clearinghouse.
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