401(a)(26) - frozen plan

[Guest guppy]

Does a frozen plan with sufficient assets to terminate satisfy 401(a)(26)? Assume that at least 40% of the company's employees are participants in the plan.

I've heard an argument that if the plan has sufficient assets to terminate, the participants are not considered "benefiting" under this section and fails.

Any thoughts?

[Belgarath]

Well, the argument doesn't make any sense to me. It runs against the regulations under 1.401(a)(26)-1 and -2. I was trying to think about why anyone would think this - I suspect that this may stem from a situation where there are SURPLUS assets, and the plan provides for the full or partial allocation of these surplus assets to the participants. If any HCE receives any of the surplus assets in this situation, then the "free pass" on coverage testing wouldn't apply, and you'd have to test. Perhaps this is what they really mean. Just speculating...

[Effen]

YEARS AGO (late 80's) I think there was a Regulation, Notice or RR that said that you must terminate all frozen db plans unless they didn't have sufficient assets to do so. I think it had something to do with 401(a)26 but I don't remember the specifics.

Sorry I'm not more help, but this may point you in the right direction. My understanding is that frozen db plans that contain sufficient assets were suppose to be terminated. That said, I don't remember the authority or reasoning.

[AndyH]

It is the prior benefit structure rules of 401(a)(26) that is the issue being referenced here. A frozen, sufficient plan will at some point violate the prior benefit structure requirement.

I'm not fluent enough to explain this in detail, but I believe that this rule is violated once the number of participants with accrued benefits in a frozen plan (that is not underfunded) drops below the 40% or 50 employee threshhold.

[Blinky the 3-eyed Fish]

Andy explains it well. See the 401(a)(26) regs to see if your plan is okay and be prepared for hours of fun.

[Guest guppy]

I think the result is really simple - a frozen plan must satisfy the 50/40% requirement (via prior benefit structure) UNLESS it is underfunded.

The "special" rule for frozen plans is that underfunded plans pass automatically while overfunded plans are subject to the 50/40% requirement like every other plan.

I think this was somehow misinterpreted to mean that overfunded plan do not pass if they are frozen and must terminate.

Thanks, I think this is cleared up.

[Guest Partly Cloudy]

I think the fun part Blinky is referring to is the fact that all current and former employees must be tested, with certain exclusions.

[Tom Poje]

one of those exclusions is former employees whose 'lump sum' is less than $5000 since you could pay them out under the involuntary distribution rules. that is fun stuff - well, at least if you are a fish.