Articles

Employment Law Update: Profit Sharing Termination

Date: July 30, 2026
Thinking about pulling the plug on your company’s profit-sharing plan? You’re not alone—it’s one of the most common questions we receive. The good news: it’s entirely doable. The key is understanding that termination isn’t a single event but a process that requires formal employer action and a complete plan wind-up. While you may have heard of Form 5310, that IRS filing is optional and doesn’t actually terminate the plan itself.
 
So, what does plan termination actually look like? First, the employer needs to take formal written action—usually through a board resolution or plan amendment. This document should do four things: (1) declare the plan terminated, (2) set a termination date, (3) halt future contributions, and (4) authorize distributions. But there’s a catch: the plan must be updated for all required qualification changes as of the termination date. Here’s where timing gets tricky: the IRS requires that a terminating plan be amended for any changes in law that take effect on or before the termination date, even if the normal amendment deadline hasn’t yet passed.
 
Here’s an important participant protection to keep in mind: upon termination, all affected participants must become fully vested in their accrued benefits or account balances—no exceptions. From there, the plan administrator takes the wheel, calculating final account balances and distributing all plan assets as soon as administratively feasible. Don’t let this step linger: the IRS has made it clear that if assets aren’t distributed, the arrangement will generally be treated as an ongoing plan that remains subject to all qualification requirements. Bottom line? Document everything you do along the way.
 
What about Form 5310? Filing this form requests an IRS determination letter confirming the plan’s qualified status at termination. It’s entirely optional, but for employers who want that extra peace of mind and official confirmation that their plan remained qualified through the finish line, it can be well worth the effort.
 
Ready to get started—or have questions about your specific situation? Whiteford’s Employment Law group is here to help with termination resolutions, required plan amendments, Form 5310 filings, and everything in between. Please reach out to Whiteford’s Employment Law group with any questions.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.