The Call That Every TPA Dreads
Years ago, my sister used to work for me. She was an excellent senior plan administrator. Our clients loved her. However, there was one type of call that made her grumble like Oscar the Grouch. When a client called and said they wanted to terminate their plan, she would smile while on the phone with the client then hang up the phone and groan. I will never forget the day she walked into my office and announced, “The next time a client calls to tell us that they want to terminate their plan, we should fire them immediately and help them find a new TPA.”
I would be lying, and you probably would be too, if I said I didn’t feel the same way. Admit it: When a client calls to terminate their plan, you know it’s going to be painful no matter how many times you try to set their expectations and explain to them that terminating a plan is not as easy as flipping a light switch. It can be long and painful. No one understands why they can’t have their money immediately; the plan sponsor doesn’t understand why they must keep paying for your services.
Every time a client wants to shut down their plan, my sister’s words ring in my ears. Plan termination is probably one of the most difficult processes we deal with as service providers. Typically, clients are terminating their plan for a “reason.” Those reasons are usually not pleasant ones. Maybe their business is down or bankrupt. That can make the client difficult to deal with and get in touch with. There may be an acquisition taking place. This adds stress to the business owner while they are also trying to terminate their retirement plan.
Clients never seem to realize that terminating a plan takes time. We typically tell clients to count on at least 6 months to terminate the plan and get through the entire process. Let’s talk about the process.
The first step is to adopt the resolution and amendment to cease contributions and terminate the plan. The plan termination effective date must be determined. Often in the case of termination during acquisition, the plan stays in effect until the acquisition date. Participants need to be notified of the plan termination via a Summary of Material Modifications. The recordkeeper/custodian also needs to be notified. The TPA helps identify the deadlines, effective dates and items that need to be completed. We have our clients complete a termination election form to help us identify the items relating to dates that need to be determined and help with the process.
After the effective dates and deadlines are determined and the termination process starts, the next step is to ensure that all contributions are deposited to the plan until the date of termination. This includes both employee deferral contributions and any employer contributions (including safe harbor contributions through the termination date). We must also use up any remaining plan forfeitures in accordance with the plan document. Based on the plan document, they may be used to offset contributions owed to the plan, or to pay fees related to the plan or reallocated to plan participants.
For the year of termination, the plan must also complete non-discrimination and compliance testing. This needs to be done in case of failures. Any excess contributions may need to be distributed before the final distributions are processed. All participant account balances become fully vested.
A distribution form for each participant with a balance in the plan must be obtained. This can be difficult if previously terminated participants were not previously paid out and must be located. Having a lot of previously terminated employees who need to be notified and found can slow down the plan termination process.
Due to additional fees and expenses that may be allocated to plan participants, the final termination distributions should be processed at the same time so that all participants share in those expenses. My favorite conversation with plan sponsors as it relates to this is when the owner wants his
or her distribution processed “right away” even before all forms have been collected. That could result in a serious discrimination issue, especially if fees are allocated to the participants or the market takes a serious drop.
We tell our clients up front that we will continue to bill the annual administration fee until the final Form 5500 is filed. It is often hard for them to understand the difference between the effective date of the plan termination versus the actual plan termination date based on the final distribution of the plan assets. Administrative service fees and other fees required for the operation of the plan may be paid from the plan assets. Non-settlor expenses can be allocated to each individual participant’s account pro-rata or paid from the forfeiture account if the plan document so allows. Other fees, known as settlor expenses, cannot be paid from plan assets and must be paid by the plan sponsor. We estimate the final plan fees and review them with the client at the start of the termination process so there are no surprises at the end. Often, we make them prepay the charges.
Finally, after all participants are distributed, the final Form 5500 needs to be completed and filed. This can be difficult if the plan sponsor is hard to contact.
What if the plan sponsor goes missing? A plan is considered an orphan plan if the sponsor no longer exists, cannot be located or has abandoned the plan and more than 12 months have elapsed since any contributions or distributions have occurred. There are steps that can be taken to terminate this type of plan, including having a fiduciary take over the plan to terminate it. If that can’t happen, then EBSA should be notified, and the plan can be terminated under the Abandoned Plan Program.
Partial plan terminations can also occur during the plan year. If the TPA has been receiving complete and accurate census information, it is often easy to determine whether a partial plan termination has occurred during the plan year. As a best practice, we review the partial plan termination status each year for all our clients when we do the year end testing. If one has occurred, we make the affected participants fully vested and make any necessary adjustments to their distributed account balances.
No matter how wonderful your processes are or how great your customer service skills are, plan terminations are painful for everyone. Participants want their money ASAP. Plan sponsors want to be done with it immediately, and you don’t want to field call after call asking why it’s not done yet.
In the end, I guess you could do as my sister suggested and fire them. However, sometimes it’s better to just smile, be empathetic and understanding—and do the very best you can to help your client one last time.
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