401(a)(26)

[RLR]

We have a husband and wife DB plan that excludes HCEs that are nonowners. So far the plan has passed minimum participation, but next year there will be 6 additional employees who will be eligible, except for the fact that they are excluded because of their classification. 4 employees will then be needed to pass. The document, which is a Corbel nonstandardized nonintegrated prototype, says that you bring in anyone who is there the last day of the PY first to pass min participation - the fail safe language is elected in the AA. The BPD allows an addendum to the section addressing 401(a)(26) and I would like to change it so that only the minimum number of employees among those who are there the last day of the PY will be brought in beginnning with the lowest paid employee. All employees are HCEs. Does anyone see a problem with that?

Also, the document says that an accrual will be provided to certain employees to pass minimum participation, but doesn't describe or define the accrual. Is it implied that they will accue a benefit under the current benefit formula or could they accrue a lesser amount that is "meaningful", like a TH benefit since the plan is TH? Since they are all HCEs, there should be no discrimination issues.

Any opinions would be appreciated.

[Andy the Actuary]

On facts and circumstances sounds okay but what about from perspective of future employees? How does this feel if you allow for the possibility of NHCEs? You may not have a 401(a)(26) issue but then in practice you may have a 401(a)(4) or ADEA issue.

[Effen]

If you actually read 1.401(a)(26) you will see that technically, you need to satisfy the rule every day of the plan year - it isn't just an end of year test like (a)(4) and 410(b).

Also, I believe the IRS has said they don't like "bottom up" eligibility, but I don't have a site.

Why not just cover them all with some sort of minimal benefit. Instead of excluding them, just define them as a separate group that gets a significantly lower benefit.

[Mike Preston]

Prototype? Usually incompatible with an advanced plan design. Some (not me) have been known to say that, alone, is enough for malpractice. Assuming your plan document has provisions that allow what you describe, all should be well. I doubt they exist in a prototype, though.

[Andy the Actuary]

Mike, is an individually designed plan for which an IRS determination letter is not sought grounds for malpractice? That is, if you modify a prototype but then disclose to the sponsor/PA that its underlying IRS determination letter no longer applies, do you still suggest that exposure to malpractice still applies?

[Mike Preston]

I was just referring to comments others have made. You'd have to ask them. I would suppose it would depend on the level of sophistication of the client and the other client advisors intimately involved in the decision to go along with said amendment. What do you think?

[Andy the Actuary]

My recommendation would be -- so long as it is not contrary to the agreement signed with the documents provider -- make changes to the document and submit for D-Letter as an individually designed plan. Since I'm not an attorney and only providing supporting information to the filing, have no idea how the IRS might react -- even if you spelled out exactly what you were doing. It might depend upon the examiner. It's easy to envision some examiner might contend without establishing any basis whatsoever you can't do this though all you're doing is pulling together words from different sources and calling it an individually designed document.

Better recommendation: You used a prototype. It no longer works. Have an attorney restate your document with the desired changes.

[Mike Preston]

Any competent provider with their own volume submitter plan could take on the task.