401(a)(26), but zero compensation

[Belgarath]

This has been driving us crazy. Wondered if anyone had an opinion.

You have a plan with Husband and Wife only. Wife sets up a plan. Both Husband and Wife have separate 1-person businesses, (hers corporate, his S/E) but they don't quite meet the "spousal noninvolvement clause" so they are a controlled group. To pass 401(a)(26), you can't EXCLUDE the husband from the wife's plan. Plan compensation is high-3 of plan PARTICIPATION. Husband receives zero income from wife's business, and vice versa.

First year of plan, husband doesn't do as well as anticipated, and has negative schedule C income, wife makes gazillions of dollars.

One school of thought says you fail 401(a)(26) because husband doesn't accrue a benefit. But he doesn't accrue a benefit because he has zero compensation! I can see that the letter of the law would appear to say this fails, but it is such a ridiculous result that it is hard for me to accept. And how do you provide the benefit if he has zero compensation? Do you go ahead and an 11(g) amendment to provide a minimum benefit under the de minimis rules allowing up to $10,000, even though he had zero compensation?

Or, do you consider some mathematical heresy such as he is accruing whatever benefit is provided under the plan, and is accruing 100% of zero, so this is ok?

Has anyone ever encountered anything like this?

[AndyH]

No, but for what it's worth I remember Jim Holland several years ago in a session saying "Zero compensation = not an employee = not in the test) within the context of 401(a)(4) testing, so under that theory you have only one body to worry about.

[Tom Poje]

or maybe just as applicable

1.410(b)-3(a)(2)(iii) certain employees treated as benefiting

person satisfies all the requirements for accruing a benefit but fails because of

and one of the items is 415 limit. 0 comp means the person did hit his 415 limit....

[AndyH]

Good point Tom. That would be sufficient for me.

And also now I remember JH adding at the end to what I quoted before ", any test"