401(a)(26) and Prior Benefit Structure

[Lori Foresz]

I need a bit of help digesting how a frozen plan is able to pass the prior benefit structure test under 401(a)(26).

DB plan covers only owner and wife for many years. Over time, one employee sticks around long enough to meet the plans 2-year eligibility so the plan is frozen and amended to bar new entrants.

Wouldn't this plan fail the prior benefit structure test since only HCEs have accrued benefits?

Thanks for any help.

[Blinky the 3-eyed Fish]

The fact that only HCE's have accrued benefits has nothing to do with 401(a)(26), but for other reasons you may have a problem. Read 1.401(a)(26)-3©. Apparently, in this case you have 2/3 of the nonexcludables with meaningful benefits and that would pass the 40% criterion.

Where you run into a problem is the last sentence of 1.401(a)(26)-3©(2). That sentence seems to fit your situation to a tee. Though, because it is a facts and circumstances determination, I am not sure how the IRS has interpreted this provision historically.

You could have an automatic pass of 401(a)(26) if the plan is covered by the PBGC and is underfunded. So maybe that is your out.