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Top Heavy Testing Calculation


Guest Donkey Kong

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Guest Donkey Kong

Regarding performing a top heavy test on a defined contribution plan versus a defined benefit plan, I am unsure on one aspect.

In doing the top heavy test on a DC plan I have always used the total account balance, without considering vesting, for either an active or terminated participant. However, I am not sure that same principle should apply for a terminated participant in using the PVAB method for doing the top heavy test for a DB plan. My reasoning is that when doing the valuation, the vested benefit is valued, not the total benefit for a terminated participant.

I am looking for opinions and/or any cites available.

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Not sure if I understand the question, but here goes. Are you asking how to treat partially vested participants, whether active or terminated? If so, good question.

I think the general rule is that vesting is not relevant to a T-H test, so you use the entire accrued benefit for a partially vested active employee.

For a partially vested terminated employee, I think the accrued benefit is the vested portion. That is, any benefit is determined at some event date (death, disability, termination) so that the amount of the accrued and the vesting percent are both determined at that event. If the employee terminated partially vested, I would use the vested portion.

However, there could be a couple of other points to remember:

1. If the terminated vested employee does not have at least one hour of service in the last five years (or whatever the lookback period might be), then that participant should be excluded from the test.

2. If the partially vested terminated employee is rehired, then there might be a "restoration" of the previously forfeited amount.

Anyone want to shoot holes in my reasoning?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Well, I'm sorta "on the fence" here. I don't think you should apply different standards to DB and DC plans, but the DC plan definition of when forfeiture occurs might be relevant.

I looked at the 1.416 T-H regs, especially Q&A T-24, T-28 and T-30. The language there talks about "the account balance". The only adjustments are for accrued contributions (in certain cases) or for "distributions". I doubt a forfeiture would be considered a distribution.

My conclusion is that, unless the plan has some definitions to the contrary, I would use the account balance after applying the graded vesting. But read all associated definitions carefully.

I'll muddy this up a bit more with another point found in T-24, first sentence: "...the account balance as of the most recent valuation date occurring within a 12-month period ending on the determination date..." It might be possible that the employee is active on that valuation date (hence no forfeiture) but is terminated (with partial vesting) on the determination date.

Any other opinions?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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It sounds like forfeitures are occurring before expressly permitted by the plan document, which bothers me a little. Even though for liability purposes you may be holding out only the vested portion, it seems questionable to do so for top heavy determination purposes. The rationale you suggest is a good one if the decision has already been made and now justification is being sought.

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