To terminate a 401(k) plan, the sponsor must set a formal termination date, fully vest every participant, amend the plan document, resolve any outstanding loans and domestic relations orders, file with the IRS for a determination letter, deliver required participant notices, distribute every dollar in the trust, and submit a final Form 5500. Most terminations run 12 to 18 months from board resolution to closed trust account, and the IRS user fee for the determination letter alone is $4,500 as of 2026.1Internal Revenue Service. Internal Revenue Bulletin 2026-01 Skipping any step can disqualify the trust and create tax problems for every participant, so the sequence matters.
Set the Termination Date and Fully Vest Everyone
The formal starting point is a board resolution (or the equivalent for LLCs and sole proprietors) setting a termination date. That date is the last day for all contributions: elective deferrals, employer match, and profit-sharing allocations. Communicate the date to participants, the recordkeeper, and other service providers well before it arrives.
On the termination date, every participant becomes 100% vested in all employer contributions, no matter where they stood on the vesting schedule.2Office of the Law Revision Counsel. 26 USC 411 – Minimum Vesting Standards That includes match and profit-sharing dollars that would otherwise have been forfeitable. Employee salary deferrals are already fully vested by law, so the rule bites on the employer side.3Internal Revenue Service. Retirement Topics – Termination of Plan The requirement is not negotiable; it exists to stop sponsors from terminating plans to recapture unvested employer money. Any existing forfeiture accounts also have to be cleared out before the plan closes, either by allocating them to participants or applying them to plan expenses.
Amend and Bring the Plan Document Current
The plan document needs a written amendment reflecting the decision to terminate. It must state the termination date, confirm full vesting, and describe how assets will be distributed. The board, managing member, or owner executes it depending on how the business is organized.
The document also has to incorporate every required regulatory update in effect through the termination date. Practitioners call this bringing the plan current. The IRS looks for it during the determination letter review, and a document missing amendments from prior legislation can stall the whole termination.
Confirm that every contribution owed through the termination date has actually been deposited. Late deposits of employee deferrals draw DOL scrutiny, so cleaning this up before you file anything with regulators saves trouble later.
Clear Outstanding Loans and QDROs
Participant loans and pending qualified domestic relations orders are the two biggest sources of delay. Handle them early.
A participant with an outstanding loan generally must either pay it off or accept an offset. An unpaid balance at termination becomes a plan loan offset amount, taxed as a distribution and hit with the 10% early withdrawal penalty for anyone under 59½.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Offsets triggered by plan termination, though, count as qualified plan loan offset amounts, and the participant gets until their tax filing deadline (with extensions) for that year to roll the amount into an IRA or another plan.5Federal Register. Rollover Rules for Qualified Plan Loan Offset Amounts That is far longer than the standard 60-day rollover window, and participants with loans should be told plainly.
For QDROs, the alternate payee’s share must be segregated and paid out separately. A submitted but unreviewed QDRO freezes the affected account until the order is qualified or rejected, so review anything pending before you get too far along.
File Form 5310 for a Determination Letter
Filing IRS Form 5310 asks the IRS to confirm that the termination doesn’t jeopardize the plan’s tax-qualified status.6Internal Revenue Service. About Form 5310, Application for Determination for Terminating Plan For a defined contribution plan like a 401(k), the filing is technically optional. Most advisors still recommend it. A favorable determination letter shields the sponsor from later IRS challenges to the plan’s compliance through the termination date; skipping it means carrying that risk yourself, potentially for years.
The user fee is $4,500 as of 2026. The application includes schedules showing how benefits were calculated and how assets will be paid out. IRS review often takes six months or more, which directly affects when final distributions can go out. Distributions can technically proceed in parallel, but many administrators wait for the letter before releasing money.
Give Participants the Required Notices
Before assets leave the trust, participants need two notices.
The first is a general notice that the plan is terminating, contributions are ending, and accounts will be distributed. The second is the rollover explanation required by Section 402(f) of the Internal Revenue Code, which lays out the option to roll into an IRA or another plan and describes the tax consequences of taking cash. That notice has to be delivered no fewer than 30 days and no more than 180 days before the distribution date.7Internal Revenue Service. Notice 2026-13 – Safe Harbor Explanations – Eligible Rollover Distributions A participant can waive the 30-day wait to get paid sooner, but the notice itself still has to go out.
Distribute All Plan Assets
Once filings are in motion and notices have gone out, the administrator must distribute all assets “as soon as administratively feasible.” For most plans that means several months after the determination letter arrives, though large or complicated plans stretch longer.
Cash distributions to participants (as opposed to direct rollovers) are subject to mandatory 20% federal income tax withholding on the taxable portion.8eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions The administrator remits the withholding to the IRS and issues each participant a Form 1099-R reporting the gross distribution, tax withheld, and distribution code.
Mandatory Cash-Outs Under $7,000
Under the SECURE 2.0 Act, a participant with a total balance of $7,000 or less can be cashed out involuntarily, without affirmative consent. The threshold was $5,000 before 2024, and rollover contributions don’t count toward it. The mechanics work in two tiers:
- Balances of $1,000 or less can be paid directly to the participant as a check, subject to the 20% withholding.
- Balances from $1,001 to $7,000 must be automatically rolled into a safe harbor IRA at a designated financial institution if the participant doesn’t respond with distribution instructions.
The safe harbor IRA arrangement takes lead time. The administrator has to select the provider, set the IRA terms, and confirm the investment options meet DOL safe harbor standards before any rollovers happen.
Missing Participants
Participants who can’t be located after a genuinely diligent search are one of the most stubborn bottlenecks in the process. A diligent search generally means certified mail to the last known address, review of plan and employer records, and use of electronic search tools like public databases and social media. Document every step, because DOL or IRS review may come later.
For balances that stay unclaimed, the PBGC operates a Missing Participants Program that accepts transfers from terminated defined contribution plans. Participation is optional for DC plans. Accounts held there aren’t eaten by ongoing maintenance fees, they grow at the federal mid-term interest rate, and PBGC keeps a searchable online directory to help participants find their money. PBGC charges a one-time $35 fee for transferred accounts over $250.9Pension Benefit Guaranty Corporation. Missing Participants Program for Defined Contribution Plans The alternative is rolling missing balances into safe harbor IRAs, which leaves participants to track down the IRA provider on their own.
Watch for a Partial Termination Even Without Closing the Plan
You can trigger a partial termination without meaning to. If turnover reaches 20% or more in a plan year, the IRS presumes a partial termination has occurred.10Internal Revenue Service. Partial Termination of Plan The turnover rate divides employer-initiated separations by total participants at the start of the year plus anyone who joined during the year.
Employer-initiated includes layoffs, reductions in force, and separations driven by economic conditions. Voluntary quits, deaths, disabilities, and normal retirements generally don’t count. The presumption can be rebutted by showing the turnover reflects historical norms or that the departed employees were replaced.
When a partial termination is established, every affected employee must become fully vested in employer contributions, exactly as in a full termination.11Internal Revenue Service. Retirement Plan FAQs Regarding Partial Plan Termination An affected employee is anyone who left during the plan year of the partial termination and still has an account balance. This vesting kicks in by operation of law, whether or not any form is filed, which is why downsizing sponsors often get caught by it.
Defined Benefit Plans Add a PBGC Layer
If the plan is a defined benefit pension rather than a 401(k) or other defined contribution arrangement, everything above still applies, but the Pension Benefit Guaranty Corporation adds a separate approval track. A fully funded plan can pursue a standard termination: the sponsor delivers a Notice of Intent to Terminate to affected parties 60 to 90 days before the proposed date, then files PBGC Form 500 within 180 days after the termination date.12Pension Benefit Guaranty Corporation. Standard Terminations13Pension Benefit Guaranty Corporation. Standard Termination Filing Instructions Benefits are then paid as lump sums or through annuity contracts. Underfunded DB plans must instead pursue a distress termination, which requires the sponsor and every controlled-group affiliate to meet strict financial-hardship tests reviewed by the PBGC.14Pension Benefit Guaranty Corporation. Distress Terminations Surplus assets that revert to the employer in a DB termination face a 50% excise tax, reduced to 20% only if a qualified replacement plan is established or the terminating plan boosts benefits by at least 20% of the surplus first.15Office of the Law Revision Counsel. 26 USC 4980 – Tax on Reversion of Qualified Plan Assets to Employer Reversion is essentially a DB issue; 401(k) balances belong to individuals, so there’s no employer surplus to return.
File the Final Form 5500 and Keep the Records
The last regulatory task is filing a final Form 5500 for the plan year in which all assets were distributed, marked as the “final return/report.”16Department of Labor. Instructions for Form 5500 Annual Return/Report of Employee Benefit Plan One-participant plans, including solo 401(k)s, file Form 5500-EZ instead.17Internal Revenue Service. About Form 5500-EZ, Annual Return of a One-Participant Retirement Plan or a Foreign Plan Before you file, all administrative expenses (recordkeeping, legal, audit) must be paid and the trust account formally closed.
The DOL can assess penalties of up to $2,739 per day for a Form 5500 that is late, incomplete, or inaccurate. A few months of neglect can easily add up to a five- or six-figure liability.
After the final filing is accepted, keep all records for at least six years: participant data, the executed plan document and every amendment, the determination letter, distribution records, and the final Form 5500.18U.S. Department of Labor. ERISA Advisory Council – Retention of Plan Records Both the IRS and DOL can audit a terminated plan within that window, and organized records are what protects the sponsor’s fiduciary position long after the trust is closed.