As a plan sponsor, managing a 401(k) plan comes with significant fiduciary responsibilities. These responsibilities continue even if your business ceases operations. Failure to properly terminate a plan can lead to consequences, including the plan being deemed "abandoned" by the Department of Labor (DOL).
The DOL's Employee Benefits Security Administration (EBSA) established the Abandoned Plan Program to provide a streamlined process for closing out the affairs of these plans.
This article outlines what an abandoned plan is, the process that follows, and the potential repercussions for a plan sponsor.
What is an abandoned plan?
The DOL does not have a set definition of when a plan is considered to be abandoned. Instead, they look at all of the facts and circumstances surrounding the plan sponsor and the operation of the plan. Many of these factors focus on the state of the plan sponsor, such as the employer sponsoring the plan going out of business or otherwise ceasing to exist.
Here are some common circumstances that could lead to plan abandonment:
No transactions for 12 months: The plan has had no contributions or distributions for 12 consecutive months.
Business or operations closure: The employer goes out of business and there is no one left to manage the plan's administration, filings, or distributions.
Bankruptcy: The plan sponsor files for Chapter 7 bankruptcy. In this case, the plan is automatically considered abandoned. There are special rules in place for bankruptcy.
Death of a sole proprietor/owner: For a small business, especially one with a single owner, the death of that owner can leave the plan without a named fiduciary to carry out the termination process, resulting in the plan becoming abandoned.
Lack of plan administrator: The designated plan administrator is no longer with the company, and no one else is appointed or able to take on the responsibility.
Refusal to act: The plan sponsor still exists but, after reasonable efforts to communicate with them, they refuse to take action to terminate the plan or fulfill their fiduciary duties.
Does Guideline notify plan sponsors about potential plan abandonment?
Guideline designates plans as "at risk" of abandonment if they lack payroll journals for at least 90 days or have unresolved ACH contribution failures for more than 30 days.
If a plan is at risk of being deemed abandoned, Guideline will attempt to contact the plan sponsor. If these efforts are unsuccessful and no response is received, the abandoned plan process may be initiated.
What is the abandoned plan process?
Once the abandonment process is initiated, Guideline will work with a third-party that will submit the plan information to the DOL and request to be named the "Qualified Termination Administrator" (QTA) for the plan.
Once the DOL appoints the QTA, they will then take on the fiduciary responsibility of terminating the plan and distributing the assets to plan participants. This process aims to protect the interests of participants who would otherwise be unable to access their retirement savings.
Once a plan is deemed abandoned, the QTA follows specific procedures outlined by the DOL:
Inform the EBSA: The QTA must notify the Employee Benefits Security Administration before and after the termination process.
Locate and update records: The QTA will make diligent efforts to locate and update plan records to determine the benefits owed to each participant and beneficiary.
Calculate benefits: The QTA uses reasonable care to calculate the benefits payable based on the available plan records.
Notify participants and beneficiaries: The QTA is responsible for notifying all plan participants and beneficiaries of the plan's termination, explaining their rights and options for distribution.
Distribution of benefits: The QTA distributes the benefits to participants and beneficiaries. This may involve rolling over the funds to an individual retirement plan (IRA) on behalf of missing or non-responsive participants.
Filing a summary terminal report: The QTA files a summary terminal report with the DOL after the termination is complete.
Please note, Guideline will be unable to facilitate plan changes or distributions once the plan abandonment process has been initiated with the third party. Guideline is also unable to terminate a plan without plan sponsor direction before the DOL’s Abandoned Plan Program is complete.
Are there penalties for plan sponsors?
While the Abandoned Plan Program primarily provides a way for participants to receive their funds, it does not absolve the original plan sponsor of its fiduciary duties and does not prevent the plan participants from taking action against the plan sponsor for any breach of those duties. Abandoning a plan may lead to consequences and penalties if the plan sponsor is found to have breached its fiduciary duty.
If you are a plan sponsor considering a business closure or other significant event, it is crucial to consult with a qualified professional to ensure a proper and timely plan termination. This will help you fulfill your fiduciary duties and avoid any repercussions associated with a plan being deemed abandoned.
How long does the Abandoned Plan Program take?
There is no set time frame for the Abandoned Plan Program. However, there are several notification steps with specific time frames that must occur before the DOL can even consider if a plan should be deemed abandoned.
While the process can be as short as six months, it can also take more than two years before the QTA is able to pay out assets to participants in a plan that is deemed abandoned by the DOL. A list of plans the DOL has determined to be abandoned can be found here.