Terminating Your Company Retirement Plan

Terminating your company retirement plan is a difficult decision that should be considered carefully. In some cases, however, it may be the only sensible course of action. For example, if you're a sole proprietor and the only plan participant, and if you've already accumulated the maximum permissible amount that may be distributed to you, the plan should be terminated. And if you intend to close the business permanently, that's another obvious case.

Even if you're only considering terminating your plan, it's important that you consult your financial and tax advisors, who will not only ensure that all of your financial and tax considerations are addressed, they might also be able to provide an economical alternative to terminating the plan, such as "freezing" the benefits.

If all parties agree that terminating your business's retirement plan is the appropriate step to take, you'll need to complete certain plan amendment, notification, and filing procedures to ensure a proper and complete plan termination.

SEP or SEP Plus Plans

You can terminate a Simplified Employee Pension (SEP) or SEP Plus plan by using a plan amendment, which employees must be given notice of. You may also need to notify the financial institution handling the plan that you intend to terminate the contract or agreement with it, and therefore that you will no longer be making contributions.

SIMPLE IRA Plan

Savings Incentive Match Plans for Employees (SIMPLE) IRAs can be terminated by notifying participants that the plan has been discontinued. The notice should meet the annual notice requirement and, as a result, can be terminated no earlier than the next calendar year.

To protect yourself, be sure to document in your files all notification and termination steps that you make, as you make them. There is no need to notify the IRS that your SEP or SIMPLE IRA plan has been terminated.

BASIC Plans

BASIC plans, which take the form of profit-sharing or money purchase pension plans, have more complicated termination requirements. Steps may include:

• Executing a formal, written instrument that effectively terminates the plan on a particular date
• Preparing a written notice to all plan participants that explains the ceasing of contributions
• Distributing assets as soon as administratively feasible after the plan termination date (the IRS generally views this to mean within one year after plan termination)
• Filing of a final Form 5500
• Filing an IRS Form 5310 (to receive a determination letter from the IRS that the termination did not disqualify the plan)
• Attaching an IRS Form 6088 to IRS Form 5310 (if you're requesting a plan termination determination letter)

Qualified Retirement Plan

Although qualified plans, such as a 401(k) or defined benefit plans, must be established with the intention of being continued indefinitely, as an employer you may terminate your plan when it no longer suits your business needs; for example, when you want to establish another type of retirement plan.

Typically, the process of terminating a qualified plan includes amending the plan document, determining the benefit for each participant, distributing all assets, and filing a final Form 5500. You must also notify your employees that the plan will be discontinued. Again, check with your financial institution or a retirement plan professional to see what further action is necessary to terminate your plan.

Depending on the type of small business you own — S Corporation, C Corporation, sole-proprietorship, partnership, etc. — there may be different steps you need to take once you decide to close your business for good. A visit to your accountant or tax advisor is a critical first step, as is learning the specific rules in your state about business termination.