Does death of participant affect ability to cross test?

[Dawn Hafner]

Does the actual death during the plan year of a participant (HCE) affect the ability to cross test for nondiscrim under 401(a)(4) or is mortailty just considered under the table based on his age?

I have a CT plan, one HCE, doing plan year end 12/31/01. Based on usual calculation he can do 3% to NHCEs and get 20+ for himself. He died in December 2001. What does that do if anything to the cross testing? Do we still get to use actuarial factors considering his life expectancy based on his age at death or because he is dead does he have no life expectancy, therefore no ability to CT.

I may be reading more into this than I need to. It just does not seem logical to take into consideration his benefit stream for the next 20 years when I know he is already dead. Logic more often than not does not apply though! Cites appreciated.

[Mike Preston]

You won't find any cites because the only cite you would be looking for would be a cite indicating that there is some sort of change required because of the death. There isn't any, to my knowledge. Remember that the non-discrimination regs are faithful to the concept that the measurement is to be made on a theoretical basis. The current year's benefit is assumed to be valued or measured at the testing age. That which takes place between the year in question and the testing age is the theoretical part.

[Tom Poje]

would you feel differently if the document only permitted distributions at age 65, no exceptions? (or what if the beneficiaries were to leave the $ in the plan until age '65'

Then the contribution would sit in the account and accrue to the given amount indicated in the test.

just a thought.

[Dawn Hafner]

No, because the individual was 68 when he died. Also review below:

Additional information: IRS Reg 1.401(a)(4)-12 provides that in normalizing the benefits for nondiscrimination you first convert the contribution to a "straight life annuity". The regulation defines straight life annuity to be equal to installment payments for the life of the employee that terminate at the employee's death.

Seems to me like if I calculate his contribution to be say $30K that since he is already dead I may have to consider that one lump sum installment and therefore get no benefit from CT.

I also have problems with the issue of the fact he died in 2001 and he was 68 when he died, so what is my attained age for testing? Is he 68 years old as of 12/31/01? No, he is not because he is dead.

Believe me I want to give him the contribution, I just don't want it to come back and bite me if I am missing something on the fact he actually died.

Thanks for your input. Any additional comments welcomed.

[Mike Preston]

Dawn, try this logic and see whether it makes you feel any better about the allocation. Do you think the IRS would allow you to treat an allocation to an NHCE in year of death as having no future life expectancy? I don't think they would.

[Blinky the 3-eyed Fish]

Listen to Mike.