This post covers everything you need about the 401k plan termination letter.
401(k) plans are popular employer-sponsored retirement plan that allows employees to contribute a portion of their pre-tax earnings.
Employers may also choose to contribute to the plan on behalf of their employees.
While 401(k) plans offer many benefits, such as tax advantages and retirement savings, there may be situations where you decide that the plan no longer suits your needs.
As a general rule, you can terminate your 401(k) plan at your discretion.
But you must follow certain rules and regulations when doing so including sending a written notice to plan participants at least 30 days before the plan termination date.
This notice/letter must explain the reason for the plan termination, the plan termination date, and the options available to plan participants for their account balances.
To help you get the most out of it, here I will guide you through
- What is a 401k plan termination letter?
- Why do you need a 401k plan termination letter?
- How to write an effective 401k plan termination letter
- Sample 401k plan termination letter
Let’s get started
Jump to section
What is a 401k plan termination letter?
A 401k plan termination letter is a brief statement of fact written by an employer or the plan administrator, to all the plan participants (employees) at least 30 days prior to the plan termination date to inform them that the company has decided to terminate their 401(k) retirement plan.
This letter is commonly referred to as a 401k plan termination notice or 401(k)Plan Termination Participant Notice.
This letter is an important communication tool that helps to ensure that plan participants are aware of the plan termination and have the information they need to make informed decisions about their retirement savings.
It includes information about the reasons for the plan termination, the date when the plan will be terminated, the distribution of the plan assets, and the options available to the participants.
It’s important to note that a 401(k) plan termination letter is not the same as the formal plan termination documents that must be filed with the IRS.
This is a mere notification. If you are looking for 401(k) termination documents check here.
Why do you need a 401k plan termination letter?
You need a 401(k) plan termination letter to your employees to inform them of the plan’s termination and provide them with information about their account balance and distribution options.
The termination letter serves as a formal notification to plan participants that the plan will no longer be available, and that they will need to make decisions about what to do with their retirement savings.
There are several important reasons why you need to send a 401(k) plan termination letter to your employees:
- Compliance with IRS Requirements: The IRS requires that employers formally terminate their 401(k) plan when they no longer want to maintain it. Providing a 401(k) plan termination letter to plan participants is one of the steps that must be taken in order to formally terminate the plan.
- Communication: A 401(k) plan termination letter is an important communication tool that helps to ensure that plan participants are aware of the plan termination and have the information they need to make informed decisions about their retirement savings. The letter should provide clear and concise information about the plan termination process, including the date when the plan will be terminated and the process for distributing the plan assets.
- Employee Relations: Providing a 401(k) plan termination letter to your employees can help to maintain good employee relations by showing that you are committed to keeping them informed about important changes that affect their benefits.
How to write an effective 401k plan termination letter
Writing an effective 401(k) plan termination letter requires careful consideration of the information that needs to be conveyed to plan participants.
Here are some tips on how to write an effective 401(k) plan termination letter:
- clearly and concisely explain the reason for the plan’s termination
- provide information on what plan participants need to do next
- Provide information on how the plan assets will be distributed to plan participants, including any deadlines or important dates they need to be aware of.
- Explain the various distribution options available to plan participants and provide instructions on how to request a distribution
- Provide plan participants with contact information for the plan administrator or other relevant parties who can answer their questions and provide assistance during the distribution process
- Send your letter at least 30 days before the effective date of the plan’s termination. This will give plan participants enough time to review the information and make any necessary decisions.
- Address plan participants by name and provide any specific information that is relevant to their situation, such as their account balance or vested interest.
- Thank plan participants for their participation in the plan and acknowledge the importance of retirement savings
Sample 401k plan termination letter (Simple)
[Your Company Letterhead]
[City, State ZIP Code]
Dear [Employee Name],
We regret to inform you that we have made the decision to terminate our 401(k) plan, effective [Plan Termination Date]. This decision was not made lightly, but after careful consideration, we have determined that it is in the best interest of the company to terminate the plan.
As a plan participant, you have certain rights and options related to the plan termination. Your account balance in the plan will be fully vested as of the plan termination date. You will receive a separate notice with additional information about the distribution of your account balance.
We understand that this news may be concerning, and we want to assure you that we are committed to assisting you during this transition. If you have any questions or concerns regarding the plan termination or your account balance, please do not hesitate to contact our benefits administrator, [Administrator Name], at [Contact Information].
Thank you for your understanding in this matter.
Sample 401k plan termination letter (detailed)
[Your Company Letterhead]
[City, State ZIP Code]
Dear [Employee Name],
I am writing to inform you that the retirement plan offered by [Company Name], known as the [Plan Name], will be terminated as of [Termination Date]. As a result of this termination, all plan assets will need to be distributed as soon as administratively feasible following the termination date. Please note that no additional contributions will be accepted into the plan after [Termination Date], or an earlier date if applicable.
If you are not already 100% vested in your account(s), you will become fully vested on the plan’s termination date. You will have several distribution options available to you:
- Roll over your account balance to an IRA with American Funds or another provider.
- Roll over your account balance to a Roth IRA with American Funds or another provider.
- Roll over your account balance into another qualified retirement plan.
- Receive a lump sum cash distribution of your account balance, less any required federal and state withholding.
Please note that if you have an outstanding loan, it will become due and payable on the plan’s termination date. You can make arrangements to pay the loan in full prior to requesting your distribution. If the loan is not paid in full, the outstanding balance will be offset against your account balance. The amount of the loan will be treated as taxable income to you. Generally, you may roll over all or any portion of the offset amount to avoid taxation. The length of time you have to complete the rollover will depend on what kind of plan loan offset you have.
To indicate your preferred distribution option, please complete the attached Benefit Election Form or one of the distribution forms from the Ready to Make a Move booklet and return it to [Plan Administrator or Other Person Responsible for Answering Questions About the Plan Termination]. Please read the attached 402(f) Notice of Special Tax Rules on Distributions, which describes the tax implications of your distribution request.
Please return a signed and completed form no later than [10 days before the final payout date], as indicated on the attached form. Failure to return a completed form by this date will result in one of the following actions on the morning of the final payout date:
- If your vested account balance is greater than $1,000, your account balance will be rolled over into an American Funds Traditional or Roth IRA and invested into the money market fund (Class A shares).
- If your vested account balance is $1,000 or less, a check representing your account balance (less applicable tax withholdings) will be made out to you and mailed to your last known mailing address. The 10% penalty for early withdrawal may also apply.
Please note that the actual amount of your distribution may be more or less than your last statement depending on investment gains or losses and the administrative cost of terminating the plan and distributing your benefits. Any additional fees assessed to terminate the plan will be listed on your final statement.
If you have any questions regarding the termination of the plan or the distribution of your benefits, please contact [Plan Administrator or Other Person Responsible for Answering Questions About the Plan Termination].