EPCU finds plan sponsors fail to complete all steps in termination process

During its Termination Project, the Employee Plans Compliance Unit (EPCU) discovered that, while plan sponsors took additional steps to terminate their plan beyond adopting a resolution to terminate, they failed to complete all of the steps in the termination process.

The EPCU designed the Termination Project to learn if sponsors who indicated they adopted a resolution to terminate their plan: (1) completed the termination process, (2) complied with Revenue Ruling 89-87 for their wasting trusts, (3) filed a final Form 5500 series return, and (4) distributed all trust assets as soon as administratively feasible.

Over 75% of the sampled sponsors failed complete the termination process, the EPCU found. The EPCU set forth some common failures:

  • Failure to file a Form 5500 series return marked as the “final return/report” showing zero assets at the end of the plan year.
  • Distributing all plan assets but failing to mark the Form 5500 series return as final. Sponsors can correct this by filing an amended return, the EPCU noted.
  • Terminating the plan but not realizing there were still assets in the trust.
  • Taking a long time to distribute plan assets because of difficulty locating participants and beneficiaries. Plan sponsors may use the Department of Labor’s Field Assistance Bulletin 2004-2 for guidance in locating missing individuals for benefit distributions. The IRS no longer provides letter-forwarding services (see Rev. Proc. 2012-35).
  • Distributing all plan assets but failing to indicate zero assets at the end of the plan year on the final Form 5500 series return. Sponsors can correct this by filing an amended return.
  • Failing to distribute all plan assets as soon as administratively feasible after the plan termination date.

Planning tips

The EPCU encourages plan sponsors to review their terminated plan to see if all the steps in the termination process have been completed including: (1) filing all current and prior Form 5500 series filings, (2) filing a final Form 5500 series return showing zero assets, (3) distributing all assets, and (4) finding all missing participants and beneficiaries. Plan sponsors should also recognize the differences between active, frozen, and terminated plans. Any errors discovered should be corrected and an amended return filed, if needed.

In addition, the EPCU recommends that plan administrative procedures be corrected so the mistakes don’t happen again.

Source: IRS Employee Plans News, Issue 2014-3, March 4, 2014.

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