Applying 401(a)(26)

[Guest mike0355]

Plan year: 1/1/2011 - 12/31/2011

DB

Entry date is 1/1 and 7/1

Employees who satisfy eligibility (21/1) at 1/1/2011 = 5

Employees who satisfy eligibility at 12/31/2011 = 8

Valuation date = 1/1/2011

How many employees must receive accrual to satisfy 401(a)(26)?

(a) 40% of 5 = 2

(b) 40% of 8 = 3.2 or 4

Thanks for all responses.

[Effen]

Technically, 401(a)(26) must be satisified every day of the year. So, when you have 8, 4 of them must be benefiting, and when you have 5, only 2 of them must be benefiting.

[rcline46]

12/31/2011 if NOT an entry date. Coverage relates to those who have satisfied eligibility AND reached an entry date. Otherwise they are NOT eligible to participate in the plan. If NOT eligible to participate, then 401(a)(26) does not apply to them.

[Tom Poje]

ignorance from a DC idiot.

I thought the 1/1/2011 DB val used the 2010 info, so that would apply to 2010 not 2011?

[rcline46]

Tom, interesting question. The 'problem' is that a valuation date has effectively nothing to do with coverage. Coverage has to do with eligibility. Note in this example, that we have two entry dates with one valuation date. So in additon to whom is covered based on an entry date, coverage (and the related topic - benefitting) has to do with not only who comes into a plan, but who has left the plan without receiving a benefit.

A valuation only means determining the liabilities and assets at one point in time, and the valuation date does not even have to be related to any particular entry date. For example, a daily valued plan. Due to IRS pressures it is now rare to have a DB plan valued at other than the first of the plan year or last day of a plan year. It is possible that a person could have entered a DB plan, earned an accrued benefit, and to have been paid in between valuation dates. A fun exercise because everything would have to be hand calculated, but possible.

[Guest NJ-Center of the Universe]

For 401(a)(26) you can disregard excludable employees following the same rules for disregarding excludable employees under 410(b). Given your fact pattern, I think you need to look at the eligible employee group on 07/01. If all 8 satisfied the eligibility requirements and entered the plan on July 1, then you need to cover 4 to satisfy 401(a)(26).

[Effen]

For 401(a)(26) you can disregard excludable employees following the same rules for disregarding excludable employees under 410(b). Given your fact pattern, I think you need to look at the eligible employee group on 07/01. If all 8 satisfied the eligibility requirements and entered the plan on July 1, then you need to cover 4 to satisfy 401(a)(26).

This may be true, but it is by no means the right answer. 1.401(a)(26) is not a "snap shot" test. It must be satisified every day of the plan year. So yes, if on July 1 you have 8 eligible employees, then 4 must benefit. However, if of June 25th, you have 15 eligible employees, then 6 must benefit. To really answer this question we would need to know the plan's entry dates, eligibly provisions, and demographics for the entire year.

1.401(a)26-7 Testing on each day of the plan year.—

A plan satisfies section 401(a)(26) for a plan year only if the plan satisfies section 401(a)(26) on each day of the plan year. An employee benefits on a day if the employee is a participant for such day and the employee benefits under the plan for the year under the rules in §1.401(a)(26)-5.

(b)Simplified testing method.—

A plan is treated as satisfying the requirements of paragraph (a) of this section if it satisfies section 401(a)(26) on any single plan day during the plan year, but only if that day is reasonably representative of the employer's workforce and the plan's coverage. A plan does not have to be tested on the same day each plan year.

[JAY21]

I think the entry dates were provided. As a practical matter with only 2 entry dates anyone who has not enter the plan as of 7/1 will not enter until the following year so I'd just use your 7/1 counts as representative of "every day of the year" demographics.

[Andy the Actuary]

(b)Simplified testing method.—

A plan is treated as satisfying the requirements of paragraph (a) of this section if it satisfies section 401(a)(26) on any single plan day during the plan year, but only if that day is reasonably representative of the employer's workforce and the plan's coverage. A plan does not have to be tested on the same day each plan year.

A.T.A's application of "Hobson's Choice" -- Any Plan that continually applies the "simplified testing method" to satisfy 401(a)(26) has least 50 covered participants.