Correcting 401(a)(26) Failure

[Dougsbpc]

We administer a floor offset DB that provides 5% of pay per year to group A (stockholders) and .5% of pay to all others (group B). The offsetting plan (a 401(k) plan) provided a 10% uniform nonelective contribution for all years except the first year (5 years ago). In that first year, the two stockholders (who are group A participants in the DB) received no nonelective allocation in the 401(k) plan. All benefits except those in group A are fully offset. Therefore, the DB plan fails 401(a)(26) for that year because a uniform allocation was not made in year 1.

We are looking to correct this through VCP. Should we attempt to provide a .5% benefit AFTER the offset to group B in the DB or provide the 10% nonelective contribution in the 401(k) to stockholders, thus creating a uniform allocation. Our understanding is that any additional contributions for a closed year are not deductible.

Thanks much for any comments.

[Blinky the 3-eyed Fish]

Did you not get a determination letter covering (a)(26) at the onset of the plan? Also, this whole reasonable and unform issue is still up in the air, so why not wait until it's resolved?

That being said, I can tell you with certainty that the proposed correction will NOT be to give shareholders more benefits.

[Dougsbpc]

We know better now to get a DL on any floor offset plan.

If the method of correction is to provide .5% after the offset for that first year, that would not be so bad as there are only 7 eligible participants.

I could be wrong, but I would think providing .5% after the offset to three participants would allow the plan to pass 401(a)(26) as 40% of eligible participants would benefit.

I know this issue is still not settled, but I cant imagine the IRS ever allowing no offset for certain participants (HCE's in this case).

[Blinky the 3-eyed Fish]

We know better now to get a DL on any floor offset plan.

I have the exact opposite opinion. I would get a FDL on every offset plan.

[Dougsbpc]

Yes. That is what I am saying. In this particular case we did not get a letter, but in every future offset DB we certainly will.

[Blinky the 3-eyed Fish]

I like it when we agree. Let's hug now. Grab my fins.