The Problem An “Orphan Plan” is a plan that no longer has a plan sponsor. The sponsor may no longer be in existence or may have abandoned the plan before proper plan termination and disbursement of trust assets have taken place. The most common reasons an Orphan Plan is created are death of the plan sponsor’s owners, bankruptcy or corporate mergers. Plan participants and their beneficiaries are often concerned about their benefits and contact the third-party service providers to demand payment. Typically, these service providers do not have the authority to make distributions from the trust or to terminate the plan. Even trustees who are still available to work with the plan may lack such authority. An Orphan Plan faces potential problems under the Internal Revenue Code (IRC) and ERISA. In general, the IRC includes qualification requirements relating to a retirement plan’s tax-favored status. If a plan is no longer sponsored by an employer, the plan ceases to be a qualified plan. In addition, because the plan is no longer being maintained by the employer, the plan may fall out of compliance with other requirements of the IRC. (Note: The DOL’s Employee Benefits Security Administration (EBSA) oversees ERISA matters, including the law’s fiduciary requirements that govern the termination of Orphan Plans. The agency provides information about Orphan Plans on the EBSA website. Click on “Guidance” then click on “Exemptions” then click on “Class Exemptions” then click on “Abandoned Individual Account Plans”. Questions regarding Title I of ERISA issues should be directed to the DOL.) “Exemptions” then click on “Class Exemptions” then click on “Abandoned Individual Account Plans”. Questions regarding Title I of ERISA issues should be directed to the DOL.) The Fix For an Orphan Plan, an “Eligible Party” may apply for relief from the adverse consequences of plan disqualification by correcting failures through the Employee Plans Compliance Resolution System’s (EPCRS) Voluntary Correction Program (VCP). If the plan is under IRS audit, relief can be obtained via the Audit Closing Agreement Program (Audit CAP). Revenue Procedure 2021-30, which contains the rules for VCP and Audit CAP under EPCRS, includes two important definitions: 1. Orphan Plan. The term “Orphan Plan” means any qualified plan with respect to which an “Eligible Party” has determined that the plan sponsor: No longer exists; Cannot be located; Is unable to maintain the plan; or Has abandoned the plan pursuant to regulations issued by the DOL. However, the term “Orphan Plan” does not include any plan terminated pursuant to DOL regulations governing the termination of abandoned individual account plans. 2. Eligible Party. The term “Eligible Party” means: A court appointed representative with authority to terminate the plan and dispose of the plan’s assets; In the case of an Orphan Plan under investigation by the DOL, a person or entity who the DOL determined has accepted responsibility for terminating the plan and distributing the plan’s assets; or In the case of a qualified plan to which Title I of ERISA has never applied, a surviving spouse who is the sole beneficiary of a plan that provided benefits to a participant who was (i) the sole owner of the business that sponsored the plan and (ii) the only participant in the plan. Only Eligible Parties of an Orphan Plan can apply for relief under VCP or be able to sign an Audit CAP. If the VCP is made, be sure to include a copy of the court order giving Eligible Party the authority to terminate the plan and dispose of the plan’s assets should be included. Alternatively, the submission may include other evidence that the applicant is an Eligible Party. Refer to Rev. Proc. 2019-19, section 5.03 and the Instructions for Form 8950, Application for Voluntary Correction Program (VCP) Under the Employee Plans Compliance Resolution System (EPCRS)PDF. In general, the correction procedures and principles used for Orphan Plans are the same as other plans, except that the IRS has discretion to: Determine whether full correction will be required in a terminating Orphan Plan; and Waive the VCP fee in the case of a terminating Orphan Plan, if the submission includes a request for a waiver of the fee. Making Sure It Doesn’t Happen Again Employers should take necessary steps to prevent a qualified plan from becoming an Orphan Plan. A sole proprietor could designate a successor to take charge if the principal is no longer able to, even if the sole purpose is to wind up the business and implement the plan termination. In the case of a possible bankruptcy, an employer should consider terminating the plan and distributing its assets before filing for bankruptcy. In a sale of business, merger or spinoff, ensure that the employee’s new employer will assume sponsorship of the plan; otherwise, implement the plan termination before completing the sale, merger or spinoff transaction. If preventive actions such as those outlined above have not been taken and a third party is willing to take responsibility for the administration and termination of an Orphan Plan, the third party should seek to become a court-appointed representative with the power to terminate the plan and dispose of the plan’s assets. Keep in mind that the Service is willing to work with Eligible Parties to ensure that participants and beneficiaries of Orphan Plans receive their benefits without jeopardizing the tax-favored status of those benefits (e.g., the ability to rollover monies to IRAs or other qualified plans).