Plan Termination

Plan Termination Schedule of Events

Below is a general overview of the steps involved in the plan termination process. Our goal is to work with you to complete the plan termination as quickly and smoothly as possible.

The typical plan termination process takes approximately 6 months from start to finish, assuming all required items are completed in a timely manner; various factors can shorten or extend this timeframe. For more information about each stage, please refer to the following pages for the related action items.

Part One – Initiate the Plan Termination

Action Item	Completed by	Timeframe	Details
Complete the Plan Termination Questionnaire	Plan Sponsor	2 weeks	To be completed on https://plansponsorlink.com/nova401k/
Prepare & Sign the Plan Termination Amendment	Nova & Plan Sponsor	1 week	The required plan document amendment will be prepared and sent to you via Docusign- dse_na2@docusign.net
Final Invoice Payment	Plan Sponsor	2 weeks	Payment must be received in full to continue the plan termination process.

Part Two – Close out the Plan

Action Item	Completed by	Timeframe	Details
Complete the Final Non-Discrimination Testing	Nova	1 month	Compliance testing is required each year that contributions are funded to the plan.
Complete Final Plan Contributions or Refunds	Plan Sponsor	2 months	This step is required for any action items to be completed from Compliance testing results, including forfeiture allocations as needed.
Notify the Plan Recordkeeper	Nova & Plan Sponsor	1 week	Nova will notify the recordkeeper of the intent to terminate the plan and help you complete the necessary paperwork to move forward.
Process Participant Distributions from Plan Accounts	Plan Sponsor	2-4 months	Distribution packages will be sent to all participants still in the plan. Force-out distributions will be processed as needed.
Prepare and File Form 5500	Nova & Plan Sponsor	1 month	Nova will prepare the Final Form 5500 for you to electronically sign & file; via form5500.nova401k@pension-plan-emails.com

Plan Termination Process for Plan Sponsors

Once you have decided to terminate your plan, there are additional decisions to make and important factors to consider. This overview is designed to support you in making informed decisions that best serve your company and employees.

Please be aware that proper plan administration must be continued while your plan is being terminated; including all required testing, contributions, and filings for the year in which the termination occurs and each year until the plan assets are at $0.00.

Timeline of Total Process:

The typical plan termination process takes approximately 6 months from start to finish, assuming all required items are completed in a timely manner; various factors can shorten or extend this timeframe, including the plan sponsor completing their required actions promptly and without delay.

Complete the Plan Termination Questionnaire

What date do you want contributions to stop?

When considering this date, keep in mind that you must give employees a 30-day written notice before contributions to a safe harbor plan can be discontinued. If you are unsure if your plan is safe harbor, ask your Nova Account Manager. NOTE: This notice will be given to you to disburse to your employees when you sign the plan termination amendment, so please take this into consideration with your timing.
The only exception to the 30-day notice requirement is if the company is closing or being purchased by another company. In such cases, contributions would inherently need to cease when employees stop receiving pay from the company. If the company is closed or being purchased, the date contributions stop will be the date the employees will receive their last paycheck under the company.

Plan Termination Date

If your plan is being purchased by another company, you MUST BE MINDFUL of mergers and acquisitions when determining the plan termination date. Please consult with your Nova Account Manager before you make the decision to terminate your Plan.
If the plan termination is due to an upcoming acquisition, understanding the type of acquisition is critical. In the case of a stock acquisition, the effective date of the plan termination must be prior to the stock purchase date, and the plan termination amendment must be signed prior to the stock purchase date.
If your plan is being merged into another plan, the merger date should always be the last day of the plan year, not the first day. If the plan still exists on the first day of a new plan year, it will require another year of Form 5500 filing – resulting in an additional year of administrative fees payable to Nova. Be sure to keep this in mind when coordinating the merger with the receiving plan!

IRS Determination Letter

Nova will send you an online Plan Termination Election questionnaire. As part of this process, you’ll be asked whether you’d like Nova to formally terminate the plan by requesting an IRS Determination Letter. This step is optional.
Please note that obtaining an IRS Determination Letter can take 18–24 months. The IRS charges a $4,500 fee, and Nova’s termination fees will also increase to reflect the additional time and effort involved.
If you choose to pursue a formal termination through the IRS, distributions cannot be processed, and the plan termination cannot be finalized until the determination letter is received.

Prepare & Sign the Plan Termination Amendment

Trustee:

Take time to evaluate who your current plan trustee(s) are and determine if any changes are needed.
Timing of Trustee Changes: If a new trustee is being appointed, the amendment to change the trustee must be signed before the plan termination amendment is executed.

Final Invoice Payment

Nova Fees:

Nova charges an annual administration fee. This fee is inclusive of: compliance testing, form 5500 preparation, and consulting time. Occasionally, up to 2 hours of additional services may be included (such as trust accounting), but this varies based upon the plan.
Nova does not charge a separate or prorated fee for a plan year requiring only a Form 5500 (no testing) nor for a short plan year.
If there are any assets in the plan during a given year, the full administration fee will be charged.

Additional Plan Years:

Starting around October 1st of each year, Nova’s final invoices will automatically include an additional year of administration fees.
Plan terminations typically take 6 months from notification to full liquidation.
Billing the additional plan year upfront is more efficient than trying to collect it after the plan has liquidated, or the final 5500 has been filed.
Unless there is an actual error on the invoice, invoices will not be revised. Each plan is carefully reviewed based on prior years and the timing of the request to ensure fair and complete billing.
Per the Nova Engagement Agreement, fees already collected on behalf of the plan will not be refunded, including quarterly invoices if termination notice was not provided before October 1st.
If a terminating plan is billed for an additional year of services, but liquidates before year-end, the client may request a refund of the additional year.
Nova does not automatically audit this; it is the client’s responsibility to request the refund AFTER the plan has fully liquidated.
Plan terminations will not check for current year contributions. If not testing is required due to lack of contributions, it is the client’s responsibility to inform their Nova Account Manager or Termination Specialist.

Payment of Nova Invoices:

Please note that once plan termination has been initiated, all services—including processing of distributions—will be placed on hold until the final invoice is issued, and all outstanding invoices are paid in full.

Complete the Final Non-Discrimination Testing

Proration of Compensation and Annual Limits:

If your plan is terminating mid-year, both compensation and annual contribution limits will be prorated from the first of the plan year through the termination date.
While the deferral limit itself is not prorated, plan compensation is—so a short plan year may affect how much participants can defer.
For plans subject to ADP testing, the prorated 415 contribution and compensation limits can impact testing results. This is especially important if highly compensated employees have front-loaded their deferrals, as it may affect ADP/ACP test outcomes.

Issues specific to Safe Harbor Plans – Mid Year Termination

30 Day Notice Requirement: In a Safe Harbor plan, the termination date must be communicated in writing to employees at least 30 days in advance. This requirement may cause the plan to extend into a new calendar year.

Exception: The 30-day notice is not required if the plan is terminated due to:

A business transaction where the company no longer exists
Substantial business hardship
Acquisition by another company

Once final testing is complete, any required refunds, excess contributions, and/or true-ups must be resolved before participant distributions can begin.

Loss of Safe Harbor Status

Safe Harbor plans may lose their status if terminated midyear, unless they meet specific exemptions.

Valid exemptions include:

Substantial business hardship
Company merger or acquisition

If no exemption applies:

Plan becomes subject to ADP/ACP testing
Possible refunds
Plan is subject to top heavy testing requirements and possible minimum contributions

Complete Final Plan Contributions or Refunds

Employee 401(k) Contributions:

All Employee Contributions and loan payments that have been withheld from employees’ paychecks must be remitted to the plan as soon as possible.

Safe Harbor Contribution:

All Safe Harbor Contributions must continue to be calculated and contributed through the plan’s termination date. This ensures compliance with Safe Harbor requirements and avoids potential issues with plan testing or participant benefits.

Forfeitures:

All plan forfeitures must be used. Acceptable options include:

Applying them toward plan administrative fees
Using them to fund an employer contribution
Allocating them to participants as a profit-sharing contribution

Important: If your plan is Top Heavy, please consult your Nova Account Manager before deciding how to allocate forfeitures.

Please note that forfeitures cannot be used to pay the plan termination amendment fee (though they may be applied to annual administration fees), and they cannot be returned to the employer.

Notify the Plan Recordkeeper

Recordkeeper Notification:

Be sure to notify both your broker and recordkeeper of the plan termination. Nova does not have the authority to terminate your plan’s contract with your recordkeeper. Failure to notify your recordkeeper in a timely manner may result in delays in the termination process.
However, please be aware that notifying your recordkeeper before informing Nova could lead to your plan liquidating prematurely, potentially before all necessary compliance adjustments are completed. To avoid this, coordinate the timing of your recordkeeper notification with your Nova Account Manager or Termination Specialist.

Process Participant Distributions from Plan Accounts

For employees and owners wanting to withdraw funds from the plan, please note that plan termination distributions cannot occur immediately after the plan’s termination effective date.

Distributions must be delayed until the following steps are completed:

Final plan testing is conducted
Any necessary corrections or adjustments are made
Plan-level forfeiture accounts are fully depleted

Once final testing is complete, any required refunds, excess contributions, and/or true-ups must be resolved before participant distributions can begin.

Important: If final testing results in both excess contributions and true-ups, it is recommended to process excess contributions first. Once processed, forfeited excess funds may be used to fund the true-ups.

Typically, the recordkeeper will notify participants when distributions are ready to proceed. After notification, participants will have 30 days to make an election before their accounts are transferred to a default IRA.

Please also keep in mind: Company owners and/or Plan Trustees cannot receive distributions until all other plan participants have been paid.

Loans:

Any outstanding loans must be paid in full by the plan termination date. If not, they will be treated as cash distributions and deemed in default.

Vesting:

All account balances will need to be vested 100% as of the plan termination date.
If employees are laid off before the plan termination date, it may trigger a partial plan termination, requiring that those employees also be fully vested—even if they were not originally entitled to full vesting.
This can create complications if employees take distributions, and non-vested employer contributions are forfeited, as those forfeited amounts may need to be returned to the affected employees.
Recommendation: If you plan to begin layoffs prior to the plan’s termination date, it is strongly advised to amend the plan to provide 100% vesting beforehand. Please contact your Nova Account Manager for guidance and assistance.

Prepare and File Form 5500

Form 5500 Filing Requirements:

Annual Filing Obligation: Form 5500 must be filed each year until all plan assets are fully distributed. This is a critical consideration when selecting your plan termination date.
Final Form 5500: The final filing must reflect a zero account balance. Due to the steps involved—such as final testing, corrections, and distributions—it may take several months after the termination date before this can be achieved.
Merging Plans: If your plan is merging into another, the final Form 5500 is filed in the year of the Merger Effective Date, not the year when assets are liquidated.
Additional Administration Year: If all assets cannot be distributed in the same year as the plan terminates, an additional administration year will be required, which will result in extra fees.

Plan Audit:

If your plan has more than 120 participants with account balances at the beginning of the year, a large plan audit is still required—even if the plan is terminating.