New Plan for a dead guy?

[Dennis Povloski]

Hello all!

We prepared a proposal for one of our TPA clients for a husband and wife plan. Before the plan could be adopted, the husband dies. Can the wife still adopt the plan?

I know that this depends on what the business structure was (the client's receive earned income, so I have the TPA verifying the business structure), but are there any other pitfalls to be aware of?

Thanks!

Dennis

[Effen]

Why not? Is the business entity still valid after hubby's death?

Now, if you are suggesting that it is a 412(i) plan and you want to purchase life insurance for the dead spouse, then you may have some issues. But the simple fact that he died, shouldn't have any impact on her adopting the plan.

You might want to exclude him to avoid any chance for raised eyebrows at the IRS, or did you want to provide a benefit for him?

[Lame Duck]

I'm going to flip the coin over and argue the other side. If this were a rank and file employee who terminated during the year after meeting the eligibilty requirements with enough hours of service to meet the sccrued benefit requirements, you would have to include them. Whether they would receive a payout would depend on the vesting. I think the same would hold true if a rank and file employee died during the plan year.

In this case, we are dealing with an owner who could be excluded from the plan so you don't have a 410(b) problem. However, I think you do have a problem under 401(a)(26) which requires that the plan benefit the greater of 40% of all employees of the employer, or 2 employees. This requirement must be met on each day of the plan year. if you give your plan an Effective Date of January 1, 2005, excluding the husband would not meet the requirements on each day of the plan year.

In addition, your entry dates are presumably the first day of the plan year and the first day of the seventh month of the plan year. If the husband met the eligibility requirements on the first day of the pan year, he would enter on that date. His death after that date should be irrelevant. The only question should be whether he is credited with enough hours of service during the year to accrue a benefit.

[Effen]

I agree with Mr. Duck. I forgot about the 2 person minimum.

[Dennis Povloski]

Thank you all!

I agree with Mr. Duck as well, I just wanted to make sure that there weren't any other issues that I didn't think of.

For this case, as the TPA just informed me, the business is an LLC in which both husband and wife share ownership and will continue despite the fact that the hubby is passed away. So it looks like essentially, he comes in accruing one year of participantion, then in the next year, he has an accrued benefit but drops out of the funding.

[mwyatt]

Drops out of funding yes, but I presume that your document provides for full vesting on death, so you will carry some sort of liability for the deceased.

[Larry M]

Now, I am confused (this has been happening too frequently lately, but that belongs in another thread..).

Why is 401(a)(26) being brought into the situation?

There are many plans covering the sole employee...and they are qualified.

[Effen]

Because I suggested that they exclude the dead husband. Lame D. pointed out that this would cause the plan to fail 401(a)(26) because it doesn't cover 2 ees.

Covering 1 of 1 is fine, but not 1 of 2.

401(a)(26)(A) IN GENERAL. --In the case of a trust which is a part of a defined benefit plan, such trust shall not constitute a qualified trust under this subsection unless on each day of the plan year such trust benefits at least the lesser of --

401(a)(26)(A)(i) 50 employees of the employer, or

401(a)(26)(A)(ii) the greater of --

401(a)(26)(A)(ii)(I) 40 percent of all employees of the employer, or

401(a)(26)(A)(ii)(II) 2 employees (or if there is only 1 employee, such employee).