"Active participation" in DB plan

[billfgrady]

A participant in a DB plan wants to know whether he and/or his wife are eligible to make deductible contributions to traditional IRAs for 2007. The DB plan was frozen in 2005. However, the employer was apparently required to make additional contributions to the plan--what they are claiming are "actuarial adjustments"--before terminating the plan in August 2007. The question here is whether there was active participation in the plan in 2007. Normally, relying on Notice 87-16, I would say there is no active participation in a frozen DB plan. However, does the fact that some sort of actuarial adjustment was made change this? I'm guessing that it does.

[AndyH]

Either the plan was (and remains) frozen or it was not.

Many things can be "adjusted" without changing the basic facts. If you want to know, you have to ask the details.

[david rigby]

From Notice 87-16:

A16: If an individual participants in a defined benefit plan in which benefit accruals are frozen for the entire plan year ending with or within the individual's taxable year, is such individual an active participant in such plan for the taxable year?

A: No. When a plan is frozen, i.e., when benefit accruals under a plan have ceased for all participants, an individual in such a plan is not an active participant. However, where a benefit may vary with future compensation, all accruals will not be considered to have ceased. For example, a “High 3” plan, in which future accruals have ceased but the actual benefit will depend upon future compensation, will not be considered as a plan in which accruals have ceased for all participants.

This may, or may not, apply to your fact situation.

... the employer was apparently required to make additional contributions to the plan--what they are claiming are "acturial adjustments"--... (sic)

This may be contributions required due to underfunding, experience losses, etc. If so, that does not alter a plan's frozen status.

[AndyH]

This phase just got outlawed by somebody, but that can't take effect until after the Super Bowl:

"It is what it is"

What is it?

[billfgrady]

Thanks for the help.

[mwyatt]

Presuming that

1) Accruals were subject to a hard freeze (i.e., no adjustments due to comp increases), and

2) When plan terminated in 2007 and paid out, no excess assets,

then I would say they were eligible for the deductible IRA contribution for 2007. Fact that employer had to make additional contributions to plan post 2005 is not surprising as many frozen plans were underfunded (hence one reason for freezing). Contribution by employer not adding anything to what participant will receive.

[AndyH]

That is a good point about the an excess asset allocation, if done. I'll bet that is often overlooked for many purposes but it would seem to be a 410(b)/401(a)(26) incident in one of the years, presumably either the one containing an amendment or the one containing the allocation.

But I doubt that the IRA implication is policed.