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Restricted Distributions

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Since I'm distinctly not a DB person, I'll spare you the weirdness of this situation and just ask one small question: When you have a terminating plan that wants to offer a lump-sum window, and the AFTAP is too low to allow it without (in this particular case) going with the special bonding rule to allow the lump sum to a couple of Highly Compensated people...


For these purposes - are the "top 25" HCE's or former HCE's determined under the 414(q) definition, or does it mean the 25 highest paid, regardless of whether they are HCE's under 414(q)? I believe it is the former, but I'd love to get confirmation from someone who knows something about all this! Thanks in advance.

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The top-25 rule does not depend on the plan's AFTAP per se. There is an AFTAP-based lump sum restriction, but it is different.

The top-25 HCE rule is found in 1.401(a)(4)-5(b)(3). For this purpose, the restricted employees are the top 25 current or former most-highly paid HCEs. The rule is found in the 401(a)(4) regs and the definition of HCE is the usual definition for 401(a)(4) purposes.

However, this entire paragraph in the regulations is under the heading "pre-termination restrictions." This rule is not usually meaningful upon plan termination, since you have to pay these people out regardless. If you are offering a window prior to plan termination, that might still fall under pre-termination, though.

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Thank you! And yes, the actuary wants to offer a pre-termination window. We don't administer the DB plan, but get dragged in to some extent due to the 401(k). Again, the details are very convoluted and it isn't worth even attempting to explain!

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