What are my options when it comes to freezing or terminating my plan?

Question:

I am hiring some employees this year, so I think I may want to freeze or terminate my plan. What are the options I should consider?

Answer:

Here are some options as we determine your final funding for the current year. You need to finalize your W-2s and ensure your contributions are in line. 

As of now, you may still have a solo plan. This could be because all your new employees were hired in the current year and therefore are not eligible. Therefore, the good news is that you still qualify as a solo plan, and you can contribute without having to worry about employees.

But for next year, these employees will fall under the plan assuming they’re still working for you, and it might be cost prohibitive to keep it open.

Therefore, you probably do not want to have the plan open for employees for next year. As a result, your options are to terminate the plan or freeze it. I will spell out the things you need to consider under both scenarios.

Option #1 - Terminate Plan

You can terminate the plan effective at the end of the year. Because you are the only employee, you can contribute but can’t have the plan overfunded. 

As a result, you could take a large W-2 that would allow you to get in a substantial contribution. You would make this contribution as soon as possible, and then we would file the paperwork to terminate and do all the processing. You can then roll the money out into an IRA.

You have to pay the termination fee and we also would bill you upfront for the annual administration that would typically be billed in April. 

Option #2 – Freeze the Plan

In this option, we would freeze the plan. That way, your employees in next year will not be able to accrue service time. Of course, this also limits you from accruing any service time.

The advantage of this approach is that the plan stays open and you can unfreeze and fund a couple years down the road. This also gives you the ability to fund the plan in future years, up to the maximum allowable funding. So you could potentially be able to fund more next year without having to contribute for employees.

However, this funding comes with two large negatives. First, you still have to pay us for our administration fees even though the plan is frozen. This is because the IRS still requires annual actuary certification. Second, even though you can fund the extra amount you would not earn any service time (because the plan is frozen) and it results in overfunding which could be subject to excise tax and penalties.