401(a)(26) and Meaningful Benefits

[Dougsbpc]

A group of 12 physicians adopts a 401(k) plan and wants to adopt a DB plan.

All are HCE's and key from compensation and ownership. No employees yet. They may hire 1 or 2 employees in the future.

Only 4 want to participate in the DB but others will participate at a minimal level to pass 401(a)(26).

The meaningful benefit of 1/2% of pay per year has appeared in a few memos, especially the June 2002 IRS memo. It appears from reading the memo that only non-owner nhce's would have to be provided at least 1/2% of pay to be considered as benefiting. In this case, any nhce's they hire would have much higher benefits than 1/2% of salary.

Question: suppose 2 more physicians want to participate at a level of less than 1/2% of pay. Would they pass 401(a)(26)? Or must they receive at least 1/2% of pay to be considered?

[Effen]

Keep in mind that the .5% was the result of a memo written by Paul Schultz. There is nothing in the Code or Regulations that requires a plan to provide a .5% accrual in order to be considered benefiting. The IRS was creating a minimum benefit small enough that would provide some benefit, but wouldn't cost the employers so much that it would be worth a law suit.

If you provide some other reasonable minimum benefit I don't think you will have a problem. Use a simple cash balance minimum of 1% or 2% of pay and just ignore the .5% accrual and see what happens when you submit it. We very rarely put the .5% into our formulas and haven't really had any trouble with the IRS challenging us on (a)(26) issues.