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Employee Benefits Legal Blog Employee Benefits Related to Labor & Employment Matters

Don’t Let Your Plan Become an Orphan

Posted in Plan Administration, Retirement Plans, Welfare Plans

When talking about mergers, acquisitions and maybe even liquidations, retirement plans can sometimes get lost in the shuffle.  Asset purchases that result in the liquidation of the seller company, or acquisitions of assets by buyers, can create problems over legacy retirement plans.  These "orphan" plans just don’t disappear and they have to be dealt with properly.

An “orphan plan” is defined as a plan that no longer has a plan sponsor.  The sponsor may have disappeared because of bankruptcy or merger, but the primary factor leading to the "orphan" status is that the reported plan sponsor is no longer in existence.   The plan may have been abandoned or simply forgotten but it still has to be dealt with because the IRS and DOL don’t let plans simply disappear.  You also have to be wary of the possibility that an "orphan" plan will lose its tax qualified status.  In order to be a qualified plan, the sponsor has to be an employer and if that is no longer the case, it would not longer maintain its tax favored status.  On top of that, there may be fiduciary concerns related to making appropriate distributions, reporting requirements and managing investments that cannot be left unattended.   

Fortunately there is a process under the IRS’s Employee Plans Compliance Resolution System (EPCRS) to deal with orphan plans, so they can be saved.  But beware that correction of an orphaned plan can be more problematic than simply addressing the plan in the first place.  Perhaps the plan can be terminated?  Should it be "adopted" by the buyer?  Will the bankruptcy trustee deal with it?  I have dealt with several orphaned plans over the years and they can be messy undertakings, particularly when the buyer did not expect them and has the matter foisted upon them.  So consider this an introduction to the term and make sure to avoid making your plan an "orphan."