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When Sponsors Abandon Their 401(k) Plans

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NU Online News Service, Oct. 30, 2003, 3:15 p.m. EST – Qualified retirement plans are popular with employees. What they don’t always count on is the possibility of a 401(k) plan being orphaned.

This is what happens when the plan sponsor goes bankrupt or otherwise abandons the plan, says Jan Jacobson, director of retirement policy at the American Benefits Council, Washington.

Without a sponsor, the plan is not qualified for the tax breaks usually accorded 401(k) plans by the Internal Revenue Service because legislation changes and there is no one to ensure the plan is meeting the evolving guidelines. So, the participants are taxed on all of the benefits immediately, Jacobson says.

“Every few years the plans need to be updated to reflect all the amendments, and there is no one around to do that,” Jacobson says. “We have a voluntary plan system that can be sponsored by employers, if something happens to the employer, it would be hard to safeguard against it.”

If the participant has a way of getting the money out of the plan, it’s probably the best thing to do, she says.

“That’s not always easy because if there is no plan sponsor, where do you get the money,” she says. “With qualified plans, there should be a trustee, if I were in that situation, that’s who I’d approach, the assets have to be somewhere.”

According to the U.S. Department of Labor, which oversees orphan plans, the warning signs of an orphan 401(k) plan include:

- An employer files for bankruptcy or merges with another company without first winding up the business affairs of a plan.

- Employees stop receiving information, such as monthly or quarterly account statements, from the plan of a former employer.

- Employees find themselves unable to contact their 401(k) plans or obtain benefits.

The department has posted a new fact sheet that gives more information about orphan plans and advice for members of orphaned plans at