Plan Termination Notices

You have been instructed to terminate a defined benefit plan and a 401(k) plan as soon as possible. The DB plan is not covered by the Pension Benefit Guaranty Corporation (PBGC), and there are no safe-harbor contributions under the 401(k) plan, so you prepare the paperwork with today as the date of termination.

The client is pleasantly surprised by the speed with which the plans can be terminated, but wonders why he does not have to give his employees advance notice and, in doing some research, stumbles upon an irs.gov webpage on participant notices in general that includes this guidance:

Notice that the Employer Is Terminating the Plan

When a plan is to be terminated, participants should receive a written notice of the company's intention to terminate the plan and a notice of plan benefits. See Terminating a Retirement Plan.  

Notice of intent to terminate: The Notice of Intent to Terminate should contain sufficient information to notify the participant of the termination of the plan. The notice might include identifying information such as:

• the plan name and number;
• the proposed termination date;
• a statement concerning the cessation of accruals (benefit accruals are ceasing); and
• a statement that there are sufficient plan assets to meet the accruals provided under the plan.

The notice must be provided to all affected plan participants and/or beneficiaries at least 60 days and no more than 90 days before the proposed date of termination.

The client now has some pointed questions for you to which you respond that they are not wrong if they follow this informal guidance, but it is not mandated by law or regulation.

There is no debate that PBGC-covered DB plans need to provide that 60-90 day notice before the date of termination, and we have other notice requirements that are spelled out.

For a DB plan when their future benefit accruals will be significantly reduced by a plan amendment or some other employer action, such as a merger, a 204(h) notice should be given at least:

• 45 days before the effective date of benefit reduction;
• 30 days for an early retirement subsidy in a merger or acquisition; and
• 15 days for other mergers or if a small pension plan is involved.

The summary of material modifications (SMM) must be provided no later than 210 days after the close of the plan year for which the modification was adopted. 

A notice describing participants' benefits and the procedures to obtain them must be given to participants within 90–180 days of when they have retired or quit working and, though that time frame may not be in the law or any regulation, it is contained in “Retirement Topics – Notices” on the irs.gov website:

Notice given to participants when they leave a company

This notice describing participants' benefits and the procedures to obtain them must be given to participants within 90 – 180 days of when they have retired or quit working.

The information given to a participant will vary depending on:

• the type of retirement plan,
• the reason the participant stopped working, and
• the participant's age.

The notice must explain a participant's right to defer receiving his or her account balance and the consequences of taking money out of a retirement plan now rather than later.

The documents provided to participants who are no longer working should contain enough information for the participant to understand their benefits and how to apply for them. The documents might contain information:

• describing the benefits that are available;
• identifying when benefits may be or will be paid; and
• listing the steps that must be taken to receive the benefits (including when and how a participant should apply).

The IRS has come a long way in providing understandable guidance on complicated topics though their website, for instance at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics, but what are you to do when your understanding of the law and regulations differs from what the IRS provides in their guidance? Who is the client supposed to believe, you or the IRS?

John Bury, EA, is President of Bury and Associates.