Plan freeze and 401(a)(26)

[rcline46]

Only plan participant is the owner. The only employee will become eligible on 1/1/2009. Eligibility is 2 years based on hire and anniversary of hire, nearest anniversary of plan.

Owner wishes to do a hard freeze - no benefits will accrue and no new participants.

401(a)(26) says if only 2 employees, both must participate (benefit) under the plan.

Can this plan be frozen?

[Belgarath]

IMHO - yes. 1.401(a)(26)-6 says that the employer would disregard excludable employees.

[rcline46]

Belgarath - that is ok for 2008, but in 2009 the employee is no longer excludable. It would appear that even the frozen plan is now in trouble. For example, if there are 100 eligible employees, the DB plan must cover at least 40 employees (even if frozen) (as I understand the rules). This 40% rule breaks down at 2 employees and the plan is required to cover both.

My concern is that even if frozen, the 40% rules still apply in 2009, and the plan now fails (a)(26). Have I misread the rules?

[Guest Sieve]

I don't think you've misread the rules. Even a frozen plan, with no current accruals, still must meet 401(a)(26)--in this case, 2 participants when the other employee no longer is excludable--with respect to the plan's "prior benefit structure". (Treas. Reg. Section 1.401(a)(26)-3.) If the plan is underfunded, however, it remains exempt from 401(a)(26) (Treas. Reg. Section 401(a)(26)-1(b)(3)).

[Andy the Actuary]

I don't think you've misread the rules. Even a frozen plan, with no current accruals, still must meet 401(a)(26)--in this case, 2 participants when the other employee no longer is excludable--with respect to the plan's "prior benefit structure". (Treas. Reg. Section 1.401(a)(26)-3.) If the plan is underfunded, however, it remains exempt from 401(a)(26) (Treas. Reg. Section 401(a)(26)-1(b)(3)).

Is the exception applicable? 1.401(a)(26)-1(b)(1) states "A plan other than a frozen defined benefit plan, blah, blah, blah satisfies 401(a)(26) blah blah blah if the plan is not top-heavy." First, the plan in question is frozen; second, it is top-heavy, so even if underfunded, not sure the the exception applies. However, the ERISA outline book supports this exception for a frozen plan provided the plan is not top-heavy. This just seems to be another confusing area to which a propeller-head must defer to the good judgment of a legal beagle.

[Guest Sieve]

Andy t.a. --

Treas. Reg. Section 1.401(a)(26)-1(b)(1) is just one of the exceptions to the IRC Section 401(a)(26) requirements. -1(b)(3) is another exception, which is independent of -1(b)(1).

Top heavy status does, however, impact the underfunded plan exception of -1(b)(3): if the plan is not subject to PBGC, then it cannot use the underfunded exception if it is top heavy. I would suspect that the OP plan is not subject to PBGC (thus, if top heavy, the exception does not apply), but the exception is there if applicable to the OP's circumstances.

[rcline46]

As I suspected. The plan is top heavy, is not subject to PBGC now (owner is only participant) and probably not a PBGC plan when ee is no longer excluded. An of course I do not know the 1/1/2009 funded status, but with the market may be underfunded.

SOOOOO... The plan cannot be frozen and survive 401(a)(26) after 2008. THEREFORE, the only solution is make a VERY SMALL benefit formula effective for 2009 and either use wearaway or A+B.

Thank you all.

[Andy the Actuary]

SOOOOO... The plan cannot be frozen and survive 401(a)(26) after 2008. THEREFORE, the only solution is make a VERY SMALL benefit formula effective for 2009 and either use wearaway or A+B.

Why not simply terminate the plan? To keep it open on the if-come that the client may later want to reopen it will require the client to continue to bear legal and actuarial costs without the benefit of significant current tax deduction. Is there any other reason why the plan needs to be maintained?

[Belgarath]

Thanks for enlightening me!

[tymesup]

SOOOOO... The plan cannot be frozen and survive 401(a)(26) after 2008. THEREFORE, the only solution is make a VERY SMALL benefit formula effective for 2009 and either use wearaway or A+B.

Why not simply terminate the plan? To keep it open on the if-come that the client may later want to reopen it will require the client to continue to bear legal and actuarial costs without the benefit of significant current tax deduction. Is there any other reason why the plan needs to be maintained?

One possible reason to keep the plan around is to avoid multiple annuity starting dates for 415 purposes. Dante is chuckling, somewhere.

Maybe this employee won't be employed by the end of the year.

[rcline46]

Owner has history of only employing people a short time. Seems this one stuck around longer. Probably will not be here very long.

MUST WATCH FOR PATTERN OF AMENDMENTS

[Andy the Actuary]

Owner has history of only employing people a short time. Seems this one stuck around longer. Probably will not be here very long.

MUST WATCH FOR PATTERN OF AMENDMENTS

A wild stab? Is this owner-employer George Steinbrenner?