401(a)(26) with a twist

[Guest BCMarch10]

Let's say there is a small company with only 2 employees. Both are HCE, over age 25, and are working full-time. They set up a DB plan.

Question 1:

Upon meeting plan eligibility - do they both have to participate and benefit? (I believe the answer is yes)

Question 2:

Now, assume both have met eligibility and have become active plan particpants. Everything is running smoothly for a few years.... and then....

Assume that the plan has a 1000 hour rule to accrue benefits and one of the employees ends up working part-time and works under 1000 hours and does not accrue a benefit in a specific plan year - is the plan now in violation of 401(a)(26)? Is the plan now REQUIRED to be amended to pass 401(a)(26)? For example, change away from the 1000 hour rule and amend the plan so that only 1 hour is needed to accrue benefits?

Twist:

Now, suppose there is only 1 employee - the owner (no spouse and no other employees)

What if the plan has a 1000 hour rule to benefit and the owner starts working part-time and works under 1000 hours and does not benefit - is the plan now in violation of 401(a)(26)? Should this plan be amended away from the 1000 hour rule also?

It seems to me that a small plan should incorporate the following plan provisions:

Plan eligibility = 21 & 1 (1 year of service for eligibility purposes should be based on 1000 hours and 12 months of employment)

Credited Service for benefit accruals = 1 hour

Thoughts/comments?

Thanks

[Andy the Actuary]

Include both to satisfy 401(a)(26). You may have different benefit formulas to suit the owners needs since there are no discrimination issues. You can keep the 1,000 hour entry rule just in case they expand the business to include a non-owner employee.

[Guest BCMarch10]

So you agree that once eligibility has been met that they MUST accrue a benefit if actively employed (even if they only work 1 hour)? And applies to both circumstances listed in "Question 2" and "Twist"?

Thx