Voluntary Plan Termination: What It is, How It Works

What is Voluntary Plan Termination?

A voluntary plan termination occurs when an employer decides to intentionally end a qualified retirement plan, such as a defined benefit pension or a 401(k) plan, stopping future contributions and benefit accruals. This process requires strict compliance with ERISA, IRS, DOL, and PBGC regulations to ensure proper distribution of existing assets to participants.

Unlike involuntary terminations initiated by the PBGC due to financial distress, voluntary terminations are employer-driven and can apply to both defined benefit and defined contribution plans.

Key Characteristics

Voluntary plan terminations have distinct features that differentiate them from other plan closures:

• Employer Initiated: The employer formally elects to end the plan, often through a board resolution.
• Funding Requirements: Standard terminations require the plan to be fully funded, ensuring all liabilities are covered before distribution.
• Participant Notification: Employees receive detailed notices about benefit options, timing, and rights.
• Regulatory Filings: Employers must submit necessary forms to the PBGC and IRS, such as Form 500 for defined benefit plans.
• Asset Distribution: Plan assets are distributed via lump sums, annuities, or rollovers within a specified timeframe.
• Applies to Various Plans: Both defined benefit pensions and 401(k) plans can undergo voluntary termination, though processes differ.

How It Works

The voluntary plan termination process begins with the employer adopting a formal resolution to end the plan, freezing future benefits and contributions. This is followed by an actuarial assessment to confirm sufficient funding, especially for defined benefit plans covered by the PBGC.

Next, the employer must notify participants and file required regulatory paperwork, including PBGC’s Form 500 and, optionally, IRS Form 5310 to maintain tax-qualified status. During the administration phase, the plan continues to operate for necessary transactions until all assets are distributed through lump sums, annuities, or rollovers. The entire process ensures compliance while protecting participants’ rights.

Examples and Use Cases

Voluntary plan terminations are common in various corporate scenarios, such as mergers, restructuring, or strategic shifts in retirement offerings.

• Airlines: Delta and American Airlines have utilized voluntary termination processes when phasing out legacy pension plans post-merger.
• Financial Services: Firms like JPMorgan Chase may choose to terminate certain defined benefit plans to streamline their retirement offerings.
• Insurance Companies: Prudential has experience managing plan terminations, ensuring compliance with regulatory standards and participant communications.
• Employee Options: Participants often receive choices to rollover benefits into other retirement accounts, such as a Backdoor Roth IRA, or take lump sum distributions.

Important Considerations

Before initiating a voluntary plan termination, employers should carefully evaluate funding levels and participant impact. Adequate communication is essential to prevent confusion and ensure participants understand their benefit options.

Employers must also consider the administrative burden and timing to avoid penalties or disqualification of the retirement plan. Consulting with experts familiar with ERISA and PBGC requirements can streamline the process and protect both employer and employee interests.