The IRS allows termination of a retirement plan along with the option to rollover funds into a new retirement account. The key is to follow IRS guidelines, plan amendments, which protect the tax-favored status of your retirement plan during termination and ensure that plan participants can, further, rollover the funds to other qualified retirement plans.
IRS has listed some plan amendments that take into account all the regulatory changes your plan must follow as per its termination date.
Required Plan Amendments before Plan Termination
Updating Your Retirement Plan as per the Cumulative Lists
IRS issues an annual cumulative list of changes in retirement plan qualification requirements, often referred as Cumulative Lists, which a retirement plan must follow. It is important to understand that Cumulative Lists are time sensitive, so choose a list that applies to your retirement plan, depending upon its termination period.
An example of the time sensitive nature of Cumulative Lists is available on IRS website, stating:
“The plan termination date is April 15, 2014. The plan must be updated for all items that apply to that plan on the 2013 Cumulative List because this list applies to the period February 1, 2014 – January 31, 2015.”
Fulfill Legal Regulations Effective after the Cumulative List Cutoff Date
Depending upon the termination period, your plan must implement law changes that came into effect after the Cumulative List cutoff date.
IRS Determination Letter to Ensure Legal Qualification for Plan Termination
The termination of a retirement plan requires legal competence that a retirement plan provider should be able to provide. However, if you’re in doubt, you can request the IRS to cross-check your plan’s qualification status at the time of termination. All you need to do is to file the relevant form, depending upon your retirement plan.
Form 5310 (Application for Determination for Terminating Plan) applies to the majority of pension, profit-sharing, and other types of deferred compensation plans.
Form 5300 (Application for Determination for Employee Benefit Plan) is the designated form for a multi-employer plan insured by the Pension Benefit Guaranty Corporation (PBGC) for requesting the determination letter.
It is important to understand that a request for the determination letter should be made only after implementing the necessary plan amendments.
The IRS provides a comprehensive list of review materials that you can use to ensure legal compliance before terminating your plan.
Important IRS Resources: