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Don't forget these steps when terminating your pension plan

Once you develop a pension plan termination strategy (PDF), it’s important to understand the plan termination rules so you can secure your participants’ benefits and settle pension liabilities as soon as possible.

When defined benefit (DB) plan assets are sufficient to terminate, all the benefits plan participants have earned must be provided in full—a process known as final risk transfer. These benefits represent the amount owed to participants upon retirement or termination. A pension plan’s liability is the present value of the participant benefits.

Your options for providing defined benefit plan benefits

There are 2 ways to provide benefits at a plan’s termination:

  1. Pay participants a single lump sum amount
  2. Purchase an annuity for them from an insurance company

Any participants who are already receiving benefits must continue to receive it via an annuity. For participants not already receiving benefits, you must offer an annuity but can choose to offer a lump sum payment as an additional option for them to consider. Learn more about the pros and cons of offering a lump sum vs. an annuity.

Additional administration duties

After the annuities have been set up and any lump sums have been paid, administrative responsibilities continue. You’ll need to file documents with the PBGC, and if there are any excess retirement funds, you’ll need to report to the IRS how those funds are handled.1

In addition, the final Form 5500 annual report filing must be completed within seven months of distribution, and tax reporting for the plan participant distributions must be completed the following January.

Administrative to-dos when terminating your DB plan

  • Confirm and update participant data
  • Choose method for distributing funds—lump sum vs. annuity
  • Fill out PBGC forms
  • Report any excess funds to the IRS
  • Complete annual Form 5500 report (within 7 months of distributing funds)
  • Tax reporting for distributions (by January of following year)

Quality data is critical

Before you begin winding down your plan, make sure your participant data is accurate. Otherwise data management concerns could continue for many years after the plan termination, requiring refunds or even exposing you to liability.

We can help

Whether your defined benefit plan has been frozen for years or you’re seeking to terminate as soon as you can, Principal has a team with DB expertise that can help meet your needs. Give us a call at 800-952-3343 or contact your financial professional to get started.

1 This is typically defined in the plan document.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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