Here is the IRS advice:
Employers that sponsor one-participant plans should take necessary steps to prevent a qualified retirement plan from becoming an orphan plan – a plan that no longer has a plan sponsor.
One of the most common reasons why a retirement plan becomes an orphan plan is because the plan sponsor no longer exists. For example, the individual employer/plan sponsor:
- passes away (and there’s no successor appointed), or
- abandons the plan before properly terminating it.
An orphan plan may fail to meet the Internal Revenue Code qualification requirements and lose its tax-favored status. If a plan is no longer sponsored by an employer, it:
- ceases to be a qualified plan
- may fall out of compliance with other Code requirements
When the sole proprietor with a one-participant plan retires, the assets must be distributed and the plan must be terminated. A distribution involves either rolling over the assets into an IRA or taking a taxable distribution.
Preventing orphan plans
Terminate the plan – review and take all applicable steps to terminate the plan if you are a plan sponsor and you:
- sell your business
- close your business
- file bankruptcy for your business that results in its closing
Name someone to effect plan termination if you are unable to or unavailable.
- Fixing Common Plan Mistakes – How to Terminate an Orphan Plan
- Retirement Topics – Termination of Plan
- Retirement Plans FAQs regarding Plan Terminations