IRS Updates Info for One-Participant Plan Sponsors

The IRS on Aug. 23 updated the information it provides to one-participant plan sponsors regarding steps they can take to prevent a qualified retirement plan from becoming an orphan plan.

An orphan plan may fail to meet the Internal Revenue Code qualification requirements and lose its tax-favored status.

IRS says that one of the most common reasons why a plan may become an orphan plan is because the plan sponsor no longer exists. This could happen, for instance, if the individual employer/plan sponsor:

• retires;

• passes away, with no successor appointed; or

• abandons the plan before properly terminating it.

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.

Another way in which a plan could become an orphan plan is for an employer to stop sponsoring a plan.

Preventing Orphan Plans

One way to accomplish this is to terminate the plan, the IRS says. It further says that plan sponsors should review and take all applicable steps to terminate the plan if they:

• sell the business;

• close the business;

• retire; or

• file for bankruptcy of the business that results in its closing.

And if a plan sponsor is unable or unavailable to terminate the plan, it should name someone to do so, the IRS says.