Do I need to freeze my cash balance plan if my business is down and I haven’t been working full-time?

Not necessarily. If you worked less than 1,000 hours during the year, you likely won’t earn a pay credit and may have little to no required funding for the plan. Keeping the plan active, rather than freezing it, can still help maintain your overall plan funding.

Freezing a plan is only beneficial in certain situations. For instance, if you expect lower income over the next few years but anticipate higher income in the future, freezing now and unfreezing later could make sense.

However, freezing the plan requires an amendment fee, and terminating the plan involves rolling out assets and potentially setting up a new plan later. These additional costs can add up, so it’s often better to leave the plan open if your income is temporarily low but expected to increase in the future.

Can a cash balance plan be terminated early, and why would I do it?

Yes, a plan can be terminated early, but there should be a valid business reason, such as reduced profits, a change in ownership, or funding challenges. The IRS has accepted situations where a business adopts a different retirement plan as justification for termination.

What is IRS Form 5310 and when is it used?

Form 5310 can be filed with the IRS to request a formal determination on a plan’s qualification status at termination. It does not certify funding accuracy or compliance throughout the plan’s life. Filing is costly (around $6,000), can take over a year, and is typically used for large plans with many participants or complex designs. Most solo business owners do not file this form.

Steps for terminating a plan

1. Review your situation to ensure termination is the best option.

2. Confirm there is reasonable cause under IRS rules.

3. Complete a termination request form, make any final contributions, and file final reports.

4. Assets do not need to be sold; they can often be rolled over “in-kind” into an IRA or another qualified plan, subject to custodian approval.

Contributions and employees during termination

• You can make a final contribution for the year before terminating.

• Unvested employees become fully vested on the termination date.

• Participants must be notified of plan termination 60 days after and no more than 90 days before the termination date.

• If employees don’t respond to rollover requests, you can distribute funds and issue 1099-R forms; the plan should not remain open indefinitely.

Timing and costs

• The termination process usually takes 6–8 weeks.

• All termination requests should be submitted two months before year-end (e.g., November 1 for calendar-year plans).

• Costs include annual administration fees plus a termination fee, which varies by the number of participants and whether a 401(k) plan is also included.

Fund rollover options

• Funds can be rolled into a new or existing IRA, or another qualified plan like a 401(k).

• Keeping assets at the same institution simplifies the process and ensures completion by year-end.

• Both 401(k) and cash balance plan assets can be rolled into the same IRA if all assets are pre-tax; Roth assets must go into a Roth IRA.

Outstanding loans

Any outstanding plan loans must be repaid before termination. If unpaid, the loan amount becomes taxable and a 1099-R is issued.

Freeze vs. terminate

In some cases, freezing the plan may be better than terminating, especially if you plan to restart a plan later.

Can I roll my cash balance plan funds into a 401(k)?

Yes. When a cash balance plan is terminated, its funds can be rolled into a 401(k) or other qualified plans. Most people choose to roll funds into an IRA because doing so avoids ongoing 5500 filing requirements associated with 401(k)s.

Basically, any qualified retirement plan can be rolled over into an IRA or 401(k).

Can cash balance plan funds be rolled into an IRA?

Yes. Upon plan termination, you can either take a lump-sum distribution or roll the funds into an IRA. Since the contributions are pre-tax, rolling into a traditional IRA keeps the funds tax-deferred until retirement.

Can I take “in-service” distributions after age 59½?

Yes, you can roll funds from a defined benefit plan into an IRA while still employed. This can be beneficial because it allows you to move funds out of a plan with a limited interest credit into an IRA with broader investment options.

However, there are some considerations:

1. 415 limits restrict the maximum amount you can roll out in a year.

2. Funds moved out won’t earn cost-of-living adjustments, potentially reducing total plan benefits.

3. The IRS may scrutinize plans with in-service distributions, as defined benefit plans are meant to be permanent.

Rollover transactions must be reviewed by an actuary, and an additional $500 annual fee may apply for plans allowing in-service distributions.

What is a QDRO?

A Qualified Domestic Relations Order (QDRO) is a legal document used in divorce proceedings to divide retirement plan assets without triggering taxes or early withdrawal penalties. Key points:

• Directs the plan administrator to pay a portion of benefits to a spouse or dependent.

• Applies to employer-sponsored plans (like 401(k)s and pensions), but not IRAs.

• Allows the receiving spouse to roll the funds into their own retirement account or receive them directly, depending on plan rules.

• Must specify amounts, percentages, and payment methods, and be approved by the plan administrator.

Resources:

• DOL QDRO Guidance

• IRS QDRO FAQs

What is the 55 Rule?

The 55 Rule allows employees who leave their employer at age 55 or older to withdraw funds from a 401(k) without the 10% early withdrawal penalty. Taxes still apply (federal and potentially state).

Since this rule only applies after leaving the employer, it generally isn’t applicable for our clients who are still actively working.

What are Required Minimum Distributions (RMDs)? Required Minimum Distributions (RMDs) are the minimum distribution amounts a retirement plan holder must withdraw or distribute annually at a certain age.

Retirement plan employee/participants and IRA owners must calculate and withdraw the RMD timely each year. The IRS has stiff penalties for any RMD failures.

For IRA owners and defined contribution plan participants who passed away subsequent to December 31, 2019, the entire balance of the plan participant’s account is required to be distributed within ten years. The IRS does allow exceptions for surviving spouses, chronically ill or disabled people, or people who are not more than ten years younger than the participant or IRA holder. The 10-year rule is applicable whether or not the participant passes away before or after the required beginning date.

Am I required to take an RMD from my 401(k) or cash balance plan if I still work in the business? Generally, you must take an RMD from your retirement plans even when you are still employed by the company. However, you may qualify for an exception if you meet both the below criteria:

• You’re still employed by the business; and

• You do NOT own more than 5% of the business.

If you meet both of the above conditions, you may delay taking the RMD until April 1st of the year after you retire from the company. However, these exception rules don’t apply to IRAs.

Are 401(k) plans and cash balance plans subject to RMDs? Yes. Both plans are subject to RMDs.

How is the RMD calculated? In general, an RMD is calculated for each qualifying retirement account by dividing the prior December 31st balance by the life expectancy factor as published by the IRS in the Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). You can select the life expectancy table based on your specific situation. There are separate tables for Joint and Last Survivor, Uniform Lifetime and Single Life Expectancy. The IRS also has worksheets to calculate the RMDs.

Can you take an RMD from one account instead of a separate RMD from each retirement account? An IRA owner must calculate the RMD separately for each IRA, but the amount may be distributed from the total amount from one or more of the IRAs.

However, any RMDs that are required from other retirement plans, such as 401(k) plans, cash balance plans and other cash balance structures, must be distributed separately from each of those specific plan accounts.

What is the age I am required to take the RMD? The SECURE Act 2.0 increased the RMD age from 72 to 73 in 2023, and then to age 75 in 2033 (or the year of retirement, if later, for certain plan participants who are not 5% owners). People who were born in 1950 or earlier are not impacted by this change and must take the RMDs due for 2022 and later years.

This change is effective for any distributions that are required in 2023 and subsequent years, for individuals who reach age 72 subsequent to December 31, 2022.

You may delay the first RMD until April 1st of the year following the year you are required to take the RMD. However, for subsequent years, including the year you received the first RMD, you must withdraw the RMD by December 31st of the respective year.

Who calculates the RMD? The account owner is ultimately responsible for calculating and withdrawing the RMD amount. However, the amount is normally calculated by the IRA custodian or third-party administrator.

Can you withdraw more than the RMD? Yes. The RMD is the minimum amount that must be withdrawn. The account owner may withdraw as much as they want.

What happens if you fail to take the RMD amount by the deadline? If an account owner fails to withdraw the required RMD amount by the deadline, the amount not withdrawn is taxed at a rate of 50%. The account owner must file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts with their personal federal tax return for the related year in which they failed to take the RMD.

Will the IRS waive the penalty for not taking the total RMD? Yes. The IRS can waive the penalty when the account owner establishes that the withdrawal shortfall resulted from a reasonable error and that they are taking steps to remedy the issue. In order to qualify for this relief, you must file IRS Form 5329 and attach a statement to the tax return explaining the circumstances. See the instructions for Form 5329.

Can a distribution above the RMD amount for a given year be applied to an RMD in the following year? No. The account owner is not allowed to carryover any excess RMD amount to subsequent years.

How are RMDs taxed? The account owner is taxed at their ordinary tax rate on the distributed amount. However, when the RMD amount includes a return of basis or a qualified distribution from a Roth IRA, it is tax-free or taxed based on the pro-rated amount.

Can you roll an RMD over into another tax-deferred retirement plan? No. You may not rollover any RMDs to another tax-deferred account. You must distribute the funds as a taxable transaction.