Terminating a 401(k)
I have 2 clients that own a business and it is in the building sector. Needless to say that with the reduction in business that contributions have ceased to their 401(k) They are the only 2 employees and one owner is 62 the other owner is 44 and they are partners in an LLC. All other employees have been laid off.
They would like to close out this 401(k) and roll over to an IRA or Roth IRA. The question is how to do this the correct way?
I would think they could modify the plan documents to suit the times. However, past employees (4Ee’s) still have account balances that have not rolled out yet either. Ultimately is it the correct way to do either trustee to trustee transfers for all involved and do them individually? Or term the pan and then how are proceeds distributed correctly?
Also, what if one of the ex-employees is unreachable, how should distributions be made?
Thanks
Chris
Permalink Submitted by Denise Appleby on Fri, 2009-01-30 16:53
Chris,
It may be best if the clients work with someone familiar with the plan termination process. There is just too much that can be missed/overlooked, and if the right steps are not taken- they could find that amounts rolled to IRAs and other plans were ineligible to be rolled over.
For instance, they need to make sure the plan is amended, the proper notifications need to be distributed-these must include specific language and are subject to specific timelines-final returns must be filed- and in some cases, it may make sense to get the IRS’ confirmation that the plan is in fact ‘qualified’. This is something that even ‘experts’ make mistakes with, so they want to be careful and work with someone who has expertise in the area.
They may already be using a plan administrator. That would be a god place to start. If the plan administrator cannot handle the termination, they will likely know someone who can.
Good luck,
Denise
Permalink Submitted by Chris Lester on Fri, 2009-01-30 17:11
Thank you Denise,
I am not afraid to let experts step in when I am not familiar enough in an area. I just like to learn along the way. I at least have some direction now on guiding the client to the plan administrator and actually will be able to get the documents as well.
I would then be able to see what the plan actually allows. I guess let me start with a basic question Denise. If the plan allows pre termination distributions, then the client could then transfer money into an IRA elsewhere (trustee to trustee into an IRA) My understanding at that point is if this owner were able to do it, and then did do it, the plan is still in place. All fees and expenses would still be applicable. What if everyone did that individually and there was no longer an account balances because everyone had rolled money out? and the only thing being administered in the fees were the administration fees?
Would the IRS then have to make a ruling on the plan being terminated?
I think that is what you are getting at. And if it gets to that point it should be handled with great care.