(b)lines Ask the Experts – Must a Frozen 401(a) Plan Be Terminated?

We are a large 501(c)(3) health care organization that froze its Employee Retirement Income Security Act (ERISA) 401(a) defined contribution plan several years ago, essentially replacing the plan with employer contributions to our 403(b) plan.

However, we have not terminated the plan; the plan has remained frozen since the initial amendment to freeze. Can the plan remain frozen indefinitely, or must we terminate the plan at some point?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:      

There is nothing in the Internal Revenue Code or ERISA that REQUIRES termination of a frozen retirement plan, so, indeed the plan can remain frozen for an indefinite period. However, as a practical matter, if there are no plans to resume contributions to the 401(a) in the future, you may wish to consider termination of the plan, for the following reasons:

1)      Virtually all of the requirements for active retirement plans apply to frozen plans, including reporting (Form 5500) and disclosure (summary plan descriptions (SPDs), summary annual reports (SARs), etc.);

2)      The plan document will be required to be updated to reflect changes in the law on an ongoing basis (and, in the Experts experience, such amendments are often overlooked, creating compliance concerns); and

3)      Frozen plans can be “forgotten” over time by both participants and plan sponsors, making the process of termination more difficult the longer it is delayed.

The primary disadvantage of terminating a defined contribution retirement plan is that distributions would be available for active employees who would otherwise not be entitled to such a benefit. However, if the plan has been frozen for several years as you state, the population of participants in the plan who are active employees is likely to be low relative to the total participant population.


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.