There will come a time for most of us (hopefully) where we need to terminate our 401(k) plan. While this is not difficult to do, please do not forget to terminate the plan. Remember you are the Trustee for the plan, and no one else can direct the plan to be terminated. It is your plan!
These steps, fortunately, do not have to be done simultaneously and you have time (not to exceed 12 months…which terminating a Solo-K plan should never take that long) to administratively close out the plan. But, while not difficult, it is not as easy as just closing your bank/brokerage account housing the 401(k) funds. Think of this visual…the plan doesn’t get created by just depositing a check, nor does it terminate with a check!
- Consult your tax professional – It is always worth talking to your tax professional as you will need to correctly report the rollover of funds in the plan to another entity (e.g., IRA). You want to make sure this is done correctly. Bottom line, it is never a bad idea to always consult your tax professional.
- Inform PGI of your intent to terminate – If PGI is not aware of your plans to terminate the plan and the termination date, we are unable to officially terminate out the plan, remove its registration and terminate the plan in the system. In addition, PGI will send you termination paperwork to complete for your files with the plan. You will want to keep this on file in case you are ever audited.
- Filing of 1099-R to report the distribution – You may remember that when you started your Solo-K and had rollover funds come into the plan, the previous plan sent you a 1099-R form reporting the distribution. The IRS also received a copy. As the business owner and Trustee of your plan, it is now your responsibility to report this rollover as well since funds are leaving the plan. You will issue the 1099-R to yourself and send a copy to the IRS.
- Distributing funds/assets-in-kind from the plan – Obviously, you will do this quickly as you will be wanting the funds moved out of the plan as soon as is possible.
- Reporting rollover on your 1040 for the tax year in which it occurred – In addition to the 1099-R, you will need to report the rollover on your 1040 tax return for that tax year. Just like you reported funds coming into the plan via rollover when you initially funded your 401(k), you will now do this in reverse. And, if this helps jog your memory…if you fail to do this, you will receive a letter from the IRS about 2 years later “suggesting” that you owe them taxes on that rollover…simply because you did not report this on your 1040 tax return (Line 4 a & b).
- Submitting a FINAL 5500-EZ Form to the IRS – You have maybe read references to the IRS not requiring the plan to submit a 5500-EZ if the assets of the plan are valued (FMV) under $250,000. This is true, with one exception. Regardless of your account value, you have to prepare a final 5500-EZ for the plan when you terminate the plan. And, there are financial penalties associated with not filing the form in a timely manner to the IRS.
- Misinformation on the submission date for the 5500-EZ – Some companies reference the fact that the 5500-EZ must be submitted by July 31st of the year following plan termination. This is correct IF the plan terminates December 31st of a particular year; however, the actual requirement is the plan must file the 5500-EZ within 7 months after the termination date. For example: if the plan terminated on August 31st of a particular year, the plan would need to file the 5500-EZ by March 31st (not July 31st) of the following year.