How to Terminate a 401k Plan

To terminate a 401(k) plan, you’ll need to follow specific steps to ensure a smooth transition. Start by checking with your plan provider to understand their procedures and any applicable fees. You’ll need to draft a plan termination resolution outlining the date of termination and the distribution options for participants. Participants should be notified in writing about the plan’s termination and their distribution choices. Consider factors like tax implications and investment options when making distribution decisions. Once the plan is terminated, you’ll need to complete administrative tasks such as filing a final Form 5500 and distributing remaining assets. By following these steps and seeking professional guidance if needed, you can effectively terminate your 401(k) plan.

Determining Plan Termination Eligibility

To determine if your 401(k) plan is eligible for termination, you need to consider the following factors:

  • Plan Size: The plan must have fewer than 100 active participants at the end of the plan year.
  • Plan Assets: The plan must have less than $5 million in assets at the end of the plan year.
  • Vesting: All participants must be fully vested in their account balances.
  • No Outstanding Loans: No participants may have any outstanding loans from the plan.
  • No Pending Distributions: No participants may have any pending distributions from the plan.

If your plan meets all of these criteria, you may be eligible to terminate the plan.

Plan FeatureEligibility Requirement
Plan SizeLess than 100 active participants
Plan AssetsLess than $5 million
VestingAll participants fully vested
Outstanding LoansNo outstanding participant loans
Pending DistributionsNo pending participant distributions

Distribution and Taxation Options for Plan Assets

Upon termination of a 401(k) plan, participants have several options for distributing their plan assets. Each option has different tax implications, so it’s important to carefully consider the options before making a decision.

  • Lump-sum distribution: Participants can receive their entire account balance in a single payment. This option results in the highest tax liability, as the entire distribution will be taxed as ordinary income.
  • Installment payments: Participants can receive their account balance over a period of time. This option can spread out the tax liability, potentially reducing the overall tax burden.
  • Rollover to an IRA: Participants can roll over their account balance to an individual retirement account (IRA). This option allows participants to defer paying taxes on the distribution until they withdraw funds from the IRA in the future.
  • Purchase an annuity: Participants can use their account balance to purchase an annuity, which will provide them with a stream of income for life. This option can guarantee a steady income stream in retirement, but it may also result in higher tax liability.
Tax Implications of 401(k) Distribution Options
Distribution OptionTax Treatment
Lump-sum distributionTaxed as ordinary income
Installment paymentsSpread out over time, potentially reducing tax burden
Rollover to an IRADefer taxes until withdrawal from IRA
Purchase an annuityHigher tax liability in some cases

Terminating Your 401(k) Plan: A Step-by-Step Guide

Terminating a 401(k) plan involves several crucial steps to ensure a smooth and compliant process. One of the most important aspects is notifying participants and beneficiaries about the termination and providing them with the necessary information.

Notifying Participants and Beneficiaries

  • Provide timely notice: Participants and beneficiaries should be notified in writing well in advance of the termination date. This notice should include the effective date of termination, any applicable deadlines, and instructions on how to distribute their account balances.
  • Distribute plan documents: Participants should also receive copies of the plan termination documents, such as the plan amendment and summary plan description (SPD), which explain the details of the termination and their rights and responsibilities.
  • Inform participants about distribution options: The notice should clearly outline the distribution options available to participants, such as rolling over their account balances to another qualified plan or taking a taxable distribution.
  • Provide contact information: Participants should be given contact information for a plan representative or administrator who can answer any questions or assist with the distribution process.
  • Allow time for questions: Give participants ample time to review the plan documents and ask any questions they may have. Additional meetings or webinars can be scheduled to address common concerns.
Distribution Options for Participants
RolloverTransferring account balance to another qualified retirement plan, such as an IRA or new 401(k)
Taxable DistributionTaking a lump sum payment that will be subject to income tax
In-Kind DistributionReceiving specific assets from the plan, such as stocks or bonds

Filing Necessary Documents

Terminating a 401(k) plan involves several steps, including filing the necessary documents with the appropriate government agencies and the plan’s trustee.


  1. File Form 5500-EZ: File this IRS form to report the plan’s final year of operation. The deadline for filing is seven months after the plan year ends.
  2. Notify Plan Participants: Inform participants in writing about the plan’s termination and provide them with information about their account balances and distribution options.
  3. Submit Plan Document Amendments: File amendments to the plan document with the IRS to officially terminate the plan.
  4. File Form 1099-R: Issue Form 1099-R to each participant who receives a distribution from the plan.

Closing the Plan

Once the necessary documents have been filed, the plan can be closed.


  • Distribute Assets: Distribute the remaining assets in the plan to the participants or roll them over to other qualified retirement accounts.
  • Liquidate Assets: If any assets remain after distributions, they must be liquidated and the proceeds distributed to participants.
  • File Final Form 5500-EZ: File a final Form 5500-EZ to report the plan’s closure.
  • Maintain Records: Keep records of all transactions related to the plan’s termination for at least six years.

By following these steps, you can effectively terminate a 401(k) plan and ensure that all legal requirements are met.

Well, folks, there you have it! A clear guide to navigating the winding roads of 401k plan termination. We hope this has been an eye-opening journey for you. Remember, every once in a while, it’s wise to review your financial plans and make sure they still serve your ever-evolving needs. So, check back with us soon for more money-savvy guidance. In the meantime, keep your wallets in a safe place and your financial goals in sight. Thanks for hanging out with us!