Takeover plan with a 401(a)(26) failure

[Blinky the 3-eyed Fish]

Calling all actuaries...

A plan I am working on for the first time has been frozen for 6 years and appears will not pass 401(a)(26) on prior benefit structure. It also appears that this year will not be the first year of the failure, as the issue was never brought up by the prior actuary.

The plan will need a corrective amendment, but for past years' failures it is too late under 1.401(a)(26)-7© and a VCP submission will be needed.

Thus my question is how do I perform the valuation? Do I consider any sort of corrective amendment or not, or do I run the valuation as if it is still frozen? It is already past the 412©(8) deadline, as this is a June year-end.

Any opinions are welcome.

[Mike Preston]

Begging the question as to how a frozen plan can fail 401(a)(26) [i will just assume that you have done a thorough job and that none of the ample exceptions apply to this particular plan], you may not take into account an amendment made after the 412©(8) deadline when calculating the minimum required contribution.

[Blinky the 3-eyed Fish]

I would assume nothing if I was you, but in this case there is a plan frozen for 6 years, under 50 people with accruals, people receiving distributions upon termination, and a decent amount of turnover over the years. A combination of trouble in this case of 401(a)(26).

Regarding how to do the valuation, what doesn't make sense is that I am doing a valuation knowing it fails coverage at the valuation date. But I don't see a method to change that, so I guess you are right Mike.

[Mike Preston]

The exception that I find that comes into play most of the time is the "underfunded PBGC plan" exception of 1.401(a)(26)-1(B)(3), but the other excpetions of 1.401(a)(26)-1(B) are sometimes useful.

The IRS is pretty consisent with the requirement to have an amendment in place to take it into account for valuation purposes.

Remember that minimum funding applies even in the case of a non-qualfiied (or disqualified) plan unless exceptions are met, so the fact that the plan might fail coverage or participation is not really an issue.

[Blinky the 3-eyed Fish]

On another note, what is your interpretation of what underfunded means? Is it based on termination liabilities or actuarial assumptions? If the latter, do you also think it's based on the funding method?

[Mike Preston]

I am not aware of anything directly on point that defines things any better than what the regulations attempt. There is nothing in the Grey Book that I can find, nor in the last few years of either the ASPA nor the ABA Q&A's. Given what little guidance there is, I usually default to deciding what makes sense on a case by case basis, usually in consultation with plan counsel.