409(p) testing and deemed owned shares

[Guest tmills]

As we know the 409(p) regs define deemed owned shares as shares allocated to a person's account plus their share of unallocated shares determined using the same proportion of shares they received in the most recent allocation. Assume for a moment that a participant retires in 2006 and gets an allocation of shares. Because he has retired, he will obviously not be getting any future allocation of shares. Assume further that allocating the unallocated shares to him results in his becoming a disqualified person and a nonallocation year. Admittedly not that likely, but possible. It appears that under the reg. he would have to receive an allocation of unallocated, even though it will never happen. Can anyone justify computing the deemed owned shares without the retired person getting an allocation of unallocated? I would think if this approach could even be justified, you would have to do it for all similarly situated participants like other terminated participants who got an allocation in 2006, and the results might not be any better than following the regs. Just wondering what the community thinks.

(Obviously in 2007 he will not get an allocation of unallocated, but if there was a nonallocation year in 2006, the plan might not make it through 2007.)

[Guest Bart]

Can anyone justify computing the deemed owned shares without the retired person getting an allocation of unallocated?

No. The rule doesn't work that way. You should have distributed some of the retired participant account balance for the non-allocation year. What happened to his diversifications distributions?

[Guest tmills]

Can anyone justify computing the deemed owned shares without the retired person getting an allocation of unallocated?

No. The rule doesn't work that way. You should have distributed some of the retired participant account balance for the non-allocation year. What happened to his diversifications distributions?

This is a hypothetical. Along those lines, you can assume that his diversification distribution availability is long gone, as it would be at 65. The question here is does anyone think a nonallocation year can be avoided by not allocating unallocated shares to someone who retired in the current year and therefore is not eligible to receive shares in future years? The scenario outlines that if this person receives what would be his share of the unallocated, a nonallocation year results. It is farfetched, but theoretically possible.

As an aside, distributing some part of the retiree's balance would accomplish what? The nonallocation year will have happened and the plan will for all practical purposes be dead. A distribution will do nothing to avoid the problem unless it is done prior to the beginning of the plan year.