401(a)(26)-retiree only

[Draper55]

I have reviewed most of the 401(a)(26) posts here for hce only plans

and usually it is with the hce still working... If the hce is considered retired

is the 401(a0(26) issue dead? in other words can an hce own a business

and run a retiree only plan? In the past it has been said that the IRS typically

did not "approve" of owner reductions in accrued benefits at termination. so is it a viable

option to fund the plan up through the ppa amortization process and then terminate?

[Effen]

it depends on what the owner wants. An "owner only" plan can really do whatever it wants. There is no problem paying the annuity, but it also isn't a problem to terminate the underfunded plan and distribute the assets to the owner. Most owners choose to terminate and rollover the assets into an IRA because an IRA is much cheaper to operate than a qualified plan.

Read the Plan Termination section of your document and you will see language allowing this. Since the plan is not covered by PBGC, you don't need to be fully funded to terminate it. Also, there is no reduction of accrued benefits to approve, since you are just following the plan's provisions.

[SoCalActuary]

Ef - I think he is asking a different question.

I read it to say that the sponsor has ongoing employees who do not benefit under the plan, and that there is an underfunded DB benefit which is only benefiting the retired owner. He wants to continue funding the benefit already earned.

Did I understand the question correctly?

[Draper55]

there are no employees here other than the owner. so the question is whether a retiree only plan

for former HCEs satisfies 401(a)(26) automatically.

a second question on another plan,once again owner(s) only..if the owners

have a zero comp year,which they did in 2012, am i right in asserting that

they automatically pass (a)(26) because .005*$0=$0 accrual . note that we are saying they

worked less than 1000 hours and so there is no accraul based on the prior high three year average pay.

a final question-once someone has achieved an accrued benefit of 100% of high three do we count the as benefiting

for 401(a)(26) beacuse 415(b) is blocking them from an additional accrual? For example:someone(owner) comes to you

with no employees and ten years of past svc and a three year average of $20000 age 62. formula is 20%*high three*svc.

initial liability approx 12*$20000=$240000. NRA = 65&5 so we fund the liability over five years and terminate. i think this okay..

am i correct?

[mwyatt]

Although the owner may consider himself retired, believe the "common sense" approach of the IRS is that in a one-person plan, the owner is essentially active until the plan terminates, regardless of how he chooses to characterize himself. Also, if he truly is retired, how is he funding the plan (must be some income being generated by the plan sponsor to deduct against - otherwise your guy is just converting after tax money into pre tax which doesn't make too much sense).

[SoCalActuary]

mwyatt has the best perspective on this issue.

If the one-person company still needs tax deductions, then continue the plan and fund as appropriate.

If they don't have earned income to offset the deduction, then don't fund the plan. If that means a termination and rollover, so be it.