401(a)26

[thepensionmaven]

We currently administer a cash balance defined benefit plan in combination with a 401(k) profit sharing plan for an employer.

There are 5 employees in the 401(k) plan, 3 are non-owners, the other two are owners. All meet the age/service reqts.

Under the 40% rule of 401(a)26, the non-owners have been excluded from the cash balance plan and are included in the 401(k) profit sharing plan.

401(a)(4) testing has been passed on a combined basis.

For 2014, there is 1 new employee who is eligible, so obviously we have to add non-owners to the plan.

Now there are 6 employees.

How is it determined which of the non-owners have to come into the plan, or do they all come in at once?

[Lou S.]

What does the Plan Document (or new amendment) say?

[thepensionmaven]

Silent on the subject.

Is there some sort of rule as to which of the excludables would come in?

I doubt the employer can just "pick and choose."

The actuary does not know; we have not used (a)26 to exclude, just to test.

[John Feldt ERPA CPC QPA]

What does the employer want to do?

Do they want to pick just one employee (perhaps the lowest cost employee based on their wages and number of years to retirement) and give them a benefit in the cash balance plan?

Or do they feel that covering just one would potentially cause some internal employee relationship problems? If so, are they willing to spend a little more to provide a perceived uniform benefit (although still only one non-owner employee might actually be considered as benefitting high enough for the 401(a)(26) test)?

Once you find out, amend the plan accordingly. Combine the plans for coverage testing and 401(a)(4) testing. Hopefully the original design anticipated an employee getting into the cash balance plan so that the employee benefit cost isn't sky high.

Remember, you can offset the overall gateway minimum by the actuarial value as a percent of pay of the cash balance pay/service credit provided to the NHCE (which is NOT equal to the cash balance credit itself). If multiple NHCEs receive cash balance pay/service credits, you can offset evenly (most common) by the average actuarial value, as a percent of pay, of the cash balance pay/service credits for each NHCE. Alternatively (not as common), you could offset each NHCE's gateway by the actuarial value, as a percent of pay, of their own cash balance pay/service credit.

[Tom Poje]

1.401(a)(26)-7© says if plan fails min participation use same method for correcting problem as with coverage 1.401(a)(4)-11(g) [a corrective amendment if plan wasn't amended to include someone by plan year end] and under those rules you usually simply increase an accrual to someone (in this situation that wouldn't work) or rant an accrual to an individual who didn't benefit.

generally that is a pick and choose as far as I understand the rules, though of course the rules require the benefit must have 'substance' as well.

I suppose if plan was amended to include someone by name to avoid the problem in the future then you have to pass coverage without the avg ben pct test, but that is probably not a problem since plans are combined for testing.