{"id":1210,"date":"2013-06-19T08:06:39","date_gmt":"2013-06-19T13:06:39","guid":{"rendered":"http:\/\/pensionblog.com\/?p=1210"},"modified":"2013-06-19T08:06:39","modified_gmt":"2013-06-19T13:06:39","slug":"small-closed-db-plans-need-to-monitor-%c2%a7401a26-status","status":"publish","type":"post","link":"https:\/\/viaactuarial.com\/2013\/06\/19\/small-closed-db-plans-need-to-monitor-%c2%a7401a26-status\/","title":{"rendered":"Small Closed DB Plans Need to Monitor \u00a7401(a)(26) Status"},"content":{"rendered":"

\"Strategy<\/a>In last week\u2019s blog post covering nondiscrimination testing pitfalls for soft-frozen pension plans<\/a>, we discussed how defined benefit (DB) plans that are closed to new participants can run afoul of the IRC \u00a7410(b) minimum coverage rules. Today\u2019s post discusses how small DB plans closed to new entrants can also have difficulties passing the IRC \u00a7401(a)(26) minimum participation test.<\/p>\n

Background<\/span><\/b>
\nIRC \u00a7401(a)(26) requires that a minimum number of employees receive a \u201cmeaningful\u201d benefit from a DB pension plan. Like \u00a7410(b), this is intended to prevent an employer from setting up a plan that only benefits a few highly compensated employees (HCEs) while the remaining staff receive minimal or no benefits.<\/p>\n

Specifically, \u00a7401(a)(26) requires that the number of benefiting employees be equal to the smaller of:<\/p>\n

1. 50 employees; or<\/p>\n

2. The larger of (a) 40% of employees or (b) 2 employees<\/p>\n

For most medium and large-sized pension plans, achieving the 50 employee threshold is easy and \u00a7401(a)(26) doesn\u2019t pose an immediate concern. However, small employers can quickly run into \u00a7401(a)(26) difficulties because a small change in the number of DB plan members can have a large impact on whether 40% of employees are benefiting in the plan.<\/p>\n

Example<\/span><\/b>
\nSuppose Company A has 50 employees and sponsors a DB plan that was closed to new entrants in 2008. The number of employees covered under the DB plan has steadily shrunk due to natural turnover and there are currently only 22 employees earning benefits in the DB plan. This means that if 5 new employees are hired (55 x 40% = 22) or if 2 current DB participants retire (50 x 40% = 20), then the plan would be on the verge of failing the \u00a7401(a)(26) minimum participation test.<\/p>\n

Strategies<\/span><\/b>
\nSo, what should sponsors of small pension plans do if faced with a \u00a7401(a)(26) failure? There are no alternative testing options, so the solutions are very similar to the plan changes that can solve a \u00a7410(b) failure.<\/p>\n

1. Freeze DB accruals for HCEs<\/p>\n

2. Freeze DB accruals for all employees<\/p>\n

3. Add new participants to the DB plan<\/p>\n

Note that Option #1 is only available if (A) the plan is not top-heavy and (B) the plan is not aggregated with any other retirement plans in order to pass other nondiscrimination tests. Most employers will likely choose option #1 or #2.<\/p>\n

Since the demographics of small DB plans can change quickly, it\u2019s imperative that plan sponsors monitor their \u00a7401(a)(26).status closely each year. Advance planning is the key to avoiding unpleasant corrective measures such as having to add new participants to the plan retroactively.<\/p>\n","protected":false},"excerpt":{"rendered":"

In last week\u2019s blog post covering nondiscrimination testing pitfalls for soft-frozen pension plans, we discussed how defined benefit (DB) plans that are closed to new participants can run afoul of the IRC \u00a7410(b) minimum coverage rules. Today\u2019s post discusses how small DB plans closed to new entrants can also have difficulties passing the IRC \u00a7401(a)(26) […]Read More… from Small Closed DB Plans Need to Monitor \u00a7401(a)(26) Status<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3,4,6],"tags":[36,32,33,34,20,21,41,49,50],"acf":[],"yoast_head":"\nSmall Closed DB Plans Need to Monitor \u00a7401(a)(26) Status - Via Actuarial Solutions<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/viaactuarial.com\/2013\/06\/19\/small-closed-db-plans-need-to-monitor-\u00a7401a26-status\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Small Closed DB Plans Need to Monitor \u00a7401(a)(26) Status - Via Actuarial Solutions\" \/>\n<meta property=\"og:description\" content=\"In last week\u2019s blog post covering nondiscrimination testing pitfalls for soft-frozen pension plans, we discussed how defined benefit (DB) plans that are closed to new participants can run afoul of the IRC \u00a7410(b) minimum coverage rules. 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