Solo 401K Plan Owners: Don’t let your Solo 401k become an orphan plan

When it comes to retirement planning for owner-only businesses and self-employed professionals, Solo 401k plan presents an excellent opportunity to speed up retirement savings. According to the IRS, you can contribute up to $59,000 to a Solo401 k plan in 2016, making it one of the most attractive retirement plans in the market.

However, a Solo 401k plan comes with a unique set of responsibilities. The plan owner/sponsor acts as the fiduciary of the plan, making them responsible towards maintaining the legal structure of the plan. One of the primary issues we come across in the industry is that of Orphan plans.

What is an orphan plan?

A retirement plan becomes an orphan plan when it no longer has a plan sponsor. A Solo 401k plan might become an orphan plan if the plan sponsor:

1. Retires
2. Passes away without appointing any successor, or
3. Deserts the plan without proper termination.

Why is it a reason to worry?

If a plan becomes an orphan plan because of any of the above reasons, the plan is in danger of losing its tax-deferred status and is no longer a qualified plan. Further, without a sponsor, the plan is no longer in compliance with the Internal Revenue Code qualification, hence creating more problems for the plan participants.

As per the regulations, after the retirement of a Solo 401k plan owner, it is necessary to terminate the plan. Plan assets should either be rolled over to a qualified IRA or must be withdrawn as taxable distributions.

How to prevent a Solo 401k plan from becoming an orphan plan?

If a Solo 401k plan owner is to retire, sell a business, close it, or file bankruptcy for the business, it is the responsibility of the plan owner to terminate the plan in accordance with the government regulations.

• Name successors in the plan: As a precautionary measure, Solo 401k plan owner should nominate successors in the plan document. In the event of no surviving spouses, one of the nominated successors can take charge of the plan and execute necessary steps.
• Business filing for bankruptcy: If a business is filing for reorganization through bankruptcy, the best option is to terminate the plan prior to the bankruptcy filing and process distributions to the eligible plan participants.

Immediate steps to follow in the absence of a plan sponsor

• Have someone take charge: If a plan sponsor ceases to exist in that capacity, the first thing to do is to notify the Department of Labor. The DOL will either appoint an independent plan sponsor or appoint a surviving spouse as the plan sponsor. It is important to move swiftly through this entire process.
• Ensure plan compliance: As soon as an eligible party takes control of the plan, they would need to ensure the plan compliance by properly terminating the plan and distributing the plan assets. The IRS has provided a step-by-step guidance through the Employee Plans Compliance Resolution System, regarding fixing retirement plans.

The key to avoiding any legal problems within your Solo 401k plan is to act preemptively. Make sure that you have set proper standing instructions for your Solo k to handle any legal emergencies.