As a plan sponsor, managing a 401(k) plan comes with significant fiduciary responsibilities that continue even if your business ceases operations. Failing 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 explains what qualifies as an abandoned plan, how the process works, and the potential consequences for plan sponsors.
The DOL does not have a set definition of when a plan is considered 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, like the employer going out of business or otherwise ceasing to exist.
Here are 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 or owner — For a small business with a single owner, the death of that owner can leave the plan without a named fiduciary to carry out the termination process
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, refuses to take action to terminate the plan or fulfill their fiduciary duties
Gusto Retirement 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, Gusto Retirement will attempt to contact the plan sponsor. If these efforts are unsuccessful and no response is received, the abandoned plan process may be initiated.
Once the abandonment process is initiated, Gusto Retirement will work with a third party that submits the plan information to the DOL and requests to be named the Qualified Termination Administrator (QTA) for the plan.
Once the DOL appoints the QTA, they take on the fiduciary responsibility of terminating the plan and distributing the assets to plan participants. This process aims to protect participants who would otherwise be unable to access their retirement savings.
To close out an abandoned plan, the QTA follows these procedures outlined by the DOL:
Inform the EBSA — The QTA notifies the Employee Benefits Security Administration before and after the termination process.
Locate and update records — The QTA makes 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 notifies all plan participants and beneficiaries of the plan's termination, explaining their rights and options for distribution.
Distribute benefits — The QTA distributes the benefits to participants and beneficiaries. This may involve rolling over the funds to an individual retirement account (IRA) on behalf of missing or non-responsive participants.
File a summary terminal report — The QTA files a summary terminal report with the DOL after the termination is done.
Important: Gusto Retirement cannot facilitate plan changes or distributions once the plan abandonment process has been initiated with the third party. Gusto Retirement is also unable to terminate a plan without plan sponsor direction before the DOL's Abandoned Plan Program is done.
While the Abandoned Plan Program primarily provides a way for participants to get their funds, it does not absolve the original plan sponsor of its fiduciary duties. It also does not prevent 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 make sure you go through 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.
There is no set time frame for the Abandoned Plan Program. However, there are several notification steps with specific time frames that need to 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 on the DOL abandoned plan search page.