Employee Benefits-IRS Provides Advice To One-Participant Plan Sponsors – Avoid Orphan Plans

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:

  1. retires
  2. passes away (and there’s no successor appointed), or
  3. 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:

  1. sell your business
  2. close your business
  3. retire
  4. file bankruptcy for your business that results in its closing 

Name someone to effect plan termination if you are unable to or unavailable. 

Additional resources