401(a)26 Problem with Frozen Plan

[Dougsbpc]

A covered defined benefit plan was frozen in 2005. The plan is now failing the prior benefit structure test of 401(a)26 with current participants. The plan does not have sufficient assets to pay benefits given 417(e) rates.

An exception applies for an under-funded plan. This exception is all about not forcing a plan with insufficient assets to terminate just to comply with 401(a)26.

Problem is this exception only applies if the schedule SB indicates the plan does not have sufficient assets to pay benefits. The MAP-21 rates indicate this plan is just over 100% funded although in reality it is about 82% funded when applying the 417(e) rates. It seems that with most issues in life you get at least a random 50/50 chance of a positive outcome. With DB plans, you have an 85% chance of the worst possible outcome even with the greatest of care.

Apparently, we can go back before the plan was frozen and add former participants to prove the prior benefit structure meets the 40% threshold. So I guess we can go back to 1988 and add former participants. This should work as all participants accrued at least 2% of pay before the plan was frozen.

Anyone see a problem with this?

Thanks.

[david rigby]

Could be a problem with the High-25 test? If so, you can't pay the lump sum anyway.

[Andy the Actuary]

Take a look at IRC 6059(b)(4) which requires the actuarial report to provide a statement containing "such other information as may be necessary to fully and fairly disclose the actuarial position of the plan, . . ." Would not this provision allow the EA to attach to the filing a statement to the effect that the Plan is underfunded within the context of IRS Reg. 1.401(a)(26)-1b(3)?