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We are the actuaries on a plan the IRS is reviewing to see if the plan meet's 401(a)(26) meaningful benefits. The IRS actuary is taking the position that meaningful benefits are determined by taking the end of year total accrued benefit, dividing it by years of credited service and then dividing by testing compensation. The actuary then compared this result to see if it meets the "0.5% meaningful test". Using the accrued benefit seems contrary to our understanding of 401(a)(26). All information we have on this points to using just the annual credit (as an annuity) and dividing by testing pay. Does anyone have any thoughts on this? Also, has anyone else seen this interpretation by the IRS? Thank you.

A DB plan currently passes 401(a)(26) easily (they're not top-heavy). The plan just now was frozen to new entrants and will freeze accruals for HCEs only. Thus it will only continue accruals only for the NHCEs that entered before the close date. It intends to stay closed and to not allow accruals for HCEs (including stopping accruals when a NHCE becomes an HCE later on). In many years, the number of non-excludable employees will dip below the 40%/50 EE threshold under 401(a)(26). The plan is not aggregated with any other plan for any purpose. Under the current rules, is there an exception for passing 401(a)(26) if the plan only has benefit accruals for NHCEs? What about the proposed rules? 401(a)(26)(B)(ii) has this: If employees described in section 410(b)(4)(B) are covered under a plan which meets the requirements of subparagraph (A) separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer meets such requirements if (I) the benefits for such employees are provided under the same plan as benefits for other employees, (II) the benefits provided to such employees are not greater than comparable benefits provided to other employees under the plan, and (III) no highly compensated employee (within the meaning of section 414(q)) is included in the group of such employees for more than 1 year. and 1.401(a)(26)-1(b) has: (1) Plans that do not benefit any highly compensated employees. A plan, other than a frozen defined benefit plan as defined in § 1.401(a)(26)-2(b), satisfies section 401(a)(26) for a plan year if the plan is not a top-heavy plan under section 416 and the plan meets the following requirements: (i) The plan benefits no highly compensated employee or highly compensated former employee of the employer; and (ii) The plan is not aggregated with any other plan of the employer to enable the other plan to satisfy section 401(a)(4) or 410(b). The plan may, however, be aggregated with the employer's other plans for purposes of the average benefit percentage test in section 410(b)(2)(A)(ii).

If a business transaction occurs, a transition rule under IRC 410(b)(6)© applies for coverage purposes. Does this transition period also apply regarding 401(a)(26)? For example, employer A covers 2 of 5 nonexcludable employees in their DB plan before the business transaction occurs. They buy company B's stock. Company B has 5 employees that would meet the plan's eligibility/entry. Does 401(a)(26) require an immediate change to the plan to add more participants, or is it transitioned just like coverage?