401(k) Plan Conversion Process

When an employer becomes dissatisfied with the 401(k) plan that it has established for its employees, it has the option of changing to a new (k) provider that may have more streamlined administration processes, better investment choices or lower fees.

The IRS considers a 401(k) plan terminated only if:

  • The date of termination is established (this can take the form of a plan amendment, board of directors’ resolution, or complete discontinuance of contributions);
  • The benefits and liabilities under the plan are determined as of the date of plan termination; and
  • All assets are distributed as soon as administratively feasible, generally within one year after the date of plan termination.

A 401(k) plan that has not distributed its assets as soon as administratively feasible is considered an ongoing plan and must continue to meet the qualification requirements, including amending the plan document for law changes.

If you maintain another plan, you may have to transfer employees’ elective deferral accounts to the other plan rather than distributing them to employees.

The procedure for doing this as mandated by the IRS can be broken down into the following steps:

1. The current plan must be amended to include:

  • Discontinuing all contributions to the current plan
  • Fully vesting all plan participants as of the termination date
  • Authorizing the plan to distribute all benefits in accordance with plan terms as soon as administratively feasible after the termination date

2. Notify all plan participants and beneficiaries about the plan termination

3. Provide a rollover notice to participants and beneficiaries

4. Plan to pay any outstanding required employer contributions to the plan

5. Vest all “affected participants”100% (applies to any employees or former employees with an account balance as of the termination date)

6. Distribute all plan assets as soon as administratively feasible (generally within 12 months) after the plan termination date to participants and beneficiaries

7. File any applicable final Form 5500 series return

8. If desired, ask the IRS to make a determination about the plan’s qualification status at termination by filing a determination letter request:

  • Form 5310, Application for Determination for Terminating Plan (instructions), for a pension, profit-sharing or other deferred compensation plan, or
  • PBGC insurance, a plan that’s only partially terminating, or for determining if the plan is part of an affiliated service group.

You must notify interested parties about your determination application.

Check with your plan’s financial institution or a retirement plan professional to see what further action is necessary to terminate your plan.

You should document all actions taken to terminate the plan.

Once the current plan has been discontinued, the employer can create a new document for the new plan, go through the employee onboarding process, request a plan representative to make a presentation to the employees about the features of the new plan and finally transfer the assets.

Employers should notify their employees of any plan freeze period that may be necessary during the replacement process.

The employer may or may not use the same plan administrator that it used with the previous plan, depending upon the reasons why the employer decided to change plans.

If the same administrator is used, then it will be responsible for sending out the notification to all employees that the plan is changing and describe the impact that this may have on all plan participants.

401(k) Plan Conversion Process FAQs

A 401(k) plan is a retirement plan offered by an employer designed to help employees save for retirement.
Amend the plan to include certain elements, vest the employees 100%, and file any relevent series 5500 forms with the IRS.
With a Roth 401(k), taxes are paid as money is put into the retirement account. With a traditional 401(k), taxes are paid as money is taken out.
Alternatives to 401(k) plans include traditional IRAs, Roth IRAs, pension plans (if your employer offers one), and 403(b) retirement plans for employees of non-profit organizations.

What Is a 401(k) Plan?

401(k) Meaning

The 401(k) retirement savings account got its name from the Revenue Act of 1978, where an addition to the Internal Revenue Services (IRS) code was added in section 401(k).

Consequently, 401(k) does not stand for anything except for the section of IRS tax code it was created in.

Traditional 401(k) vs Roth 401(k)

There are two types of 401(k) plans: Traditional and Roth 401(k)s.

The traditional 401(k), named after the relevant section of the IRS code, has been around since 1978.

With this plan, any contributions you make to the 401(k) account will reduce your income taxes for that year and will be taxed when they are withdrawn.

Roth 401(k)s, named after former senator William Roth of Delaware, were introduced in 2006.

Unlike a traditional 401(k), all contributions are made with after-tax dollars and the funds in the Roth 401(k) account accrue tax free.

Typically, employees can take advantage of both plans at the same time, which is recommended among financial advisors to maximize retirement savings.

Because of the way the contribution limits work, it is possible to invest different amounts into each account, even year-to-year, so long as the total contribution does not exceed the set limit.

Contributing to Your 401(k) Retirement Plan

Contributing to a 401(k) plan is traditionally done through one’s employer.

Typically, the employer will automatically enroll you in a 401(k) that you may contribute to at your discretion.

If you are self-employed, you may enroll in a 401(k) plan through an online broker, such as TD Ameritrade.

If your employer offers both types of 401(k) accounts, then you will most likely be able to contribute to either or both at your discretion.

To reiterate, with a traditional 401(k), making a contribution reduces your income taxes for that year, saving you money in the short term, but the funds will be taxed when they are withdrawn.

With a Roth 401(k), your contributions can be made only after taxation, which costs more in the short term, but the funds will be tax free when you withdraw them.

Because of this, deciding which plan will benefit you more involves figuring out in what tax bracket you will be when you retire.

If you expect to be in a lower tax bracket upon retirement, then a traditional 401(k) may help you more in the long term.

You will be able to take advantage of the immediate tax break while your taxes are higher, while minimizing the portion taken out of your withdrawal once you move to a lower tax bracket.

On the other hand, a Roth 401(k) may be more advantageous if you expect the opposite to be true.

In that case, you can opt to bite the bullet on heavy taxation today, but avoid a higher tax burden if your tax bracket moves up.

Check out this article from Forbes to see the IRS tax rate tables for 2020, but remember that they are subject to change.

A smart move may be to hedge your bets and divide your contributions between the two types of IRAs.

If your employer allows you to add funds to both a traditional and Roth 401(k), then doing so reduces the potential risks of each.

In this case, you will also have the ability to decide what proportion of your income goes into each account, meaning that as you near retirement and have a clearer idea of what position you will be in, you can put more into one or the other.

When you do decide which avenue to take, make sure to thoroughly evaluate your decision.

Moving funds from one account to another, such as from a traditional to a Roth 401(k), is time consuming and expensive, if even possible.

Likewise, transferring a 401(k) from one employer to another in the event of a job change is also tricky.

You want to make sure that when you put money into your plan, it will be able to sit undisturbed for a very long time.

Pension vs 401(k)


Pensions are similar to a 401(k), but are a liability to a company.

If an employer offers an employee a pension, it means that they are promising to pay out a set amount of money to the employee at the time of their retirement.

There is typically no option to grow this amount, but it also does not require any financial investment from the employee.

Pensions, also referred to as defined-benefit plans, are becoming increasingly rare because it puts the financial burden of offering a retirement fund for employees entirely on the employer.

401(k)s, which are also called defined-contribution plans, take some of the financial pressure off of an employer, while also allowing employees to potentially earn a larger retirement package than they would have with a pension.

How Much Should I Contribute to My 401(k)?

Most financial experts say you should contribute around 10%-15% of your monthly gross income to a retirement savings account, including but not limited to a 401(k).

There are limits on how much you can contribute to it that are outlined in detail below.

There are two methods of contributing funds to your 401(k).

The main way of adding new funds to your account is to contribute a portion of your own income directly.

This is usually done through automatic payroll withholding (i.e. the amount that you wish to contribute, counting all adjustments for taxation, is simply withheld when receiving payment and automatically put into a 401(k)).

The system mandates that the majority of direct financial contributions will come from your own pocket.

It is essential that, when making contributions, you consider the trajectory of the specific investments you are making to increase the likelihood of a positive return.

The second method comes from deposits that an employer matches.

Usually employers will match a deposit based on a set formula, such as 50 cents per dollar contributed by the employee.

However, employers are only able to contribute to a traditional 401(k), not a Roth 401(k) plan.

This is especially important to keep in mind if you want to utilize both types of plans.

A key variable to keep in mind is that there are set limits for how much you can add to a 401(k) in a single year.

For employees under 50 years of age, this amount is $19,500, as of 2020. For employees over 50 years of age, the amount is $25,000.

If you have a traditional 401(k), you can also elect to make non-deductible after-tax contributions.

The absolute limit, counting this choice and all employer contributions, is $57,000 for employees under 50, and $63,000 for those over 50 as of 2019.

401(k) Plan FAQs