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Please indicate if the years of service of which defined benefit minimum serve as a function must also occur as years of participation. URL https://www.ecfr.gov/current/title-26/section-1.416-1 Citation 26 CFR § 1.416-1 M-2 Q. What is the defined benefit minimum? A. (a) The defined benefit minimum requires that the accrued benefit at any point in time must equal at least the product of (i) an employee's average annual compensation for the period of consecutive years (not exceeding five) when the employee had the highest aggregate compensation from the employer and (ii) the lesser of 2% per year of service with the employer or 20%. (b) For purposes of the defined benefit minimum, years of service with the employer are generally determined under the rules of section 411(a) (4), (5) and (6). However, a plan may disregard any year of service if the plan was not top-heavy for any plan year ending during such year of service, or if the year of service was completed in a plan year beginning before January 1, 1984. (c) In determining the average annual compensation for a period of consecutive years during which the employee had the largest aggregate compensation, years for which the employee did not earn a year of service under the rules of section 411(a) (4), (5), and (6) are to be disregarded. Thus, if an employee has received compensation from the employer during years one two, and three, and for each of these years the employee earned a year of service, then the employee's average annual compensation is determined by dividing the employee's aggregate compensation for these three years by three. If the employee fails to earn a year of service in the next year, but does earn a year of service in the fifth year, the employee's average annual compensation is calculated by dividing the employee's aggregate compensation for years one, two, three, and five by four. The compensation required to be taken into account is the compensation described in Question and Answer T-21. In addition, compensation received for years ending in plan years beginning before January 1, 1984, and compensation received for years beginning after the close of the last plan year in which the plan is top-heavy may be disregarded. M-2 seems to allow the reckoning of average compensation to remain vague, though usually § 415 amounts apply for this situation. If so, please indicate if the amendment of 415 as described affected 416 defined benefit minimums. 26 USC 415: Limitations on benefits and contribution under qualified plans (3) Average compensation for high 3 years For purposes of paragraph (1), a participant's high 3 years shall be the period of consecutive calendar years (not more than 3) during which the participant both was an active participant in the plan and had the greatest aggregate compensation from the employer. In the case of an employee within the meaning of section 401(c)(1), the preceding sentence shall be applied by substituting for "compensation from the employer" the following: "the participant's earned income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)". https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title26-section415&num=0&edition=prelim Subsec. (b)(3). Pub. L. 109–280, §832(a), struck out "both was an active participant in the plan and" before "had the greatest".

Hello! We have a client that started their plan in 2022 and failed ADP and TH testing due to their owner maxing out their contribution. Their TH Funding was going to be almost $30k and they demanded a reversal of all the owner's contributions in 2022 which were processed recently after many conversations on why this was a bad idea and having them approve a hold harmless letter. Several questions about this: 1 - Does the reversal change the TH test? The balance as of 12/31/22 hasn't changed, and I know first-year plans can use accrual, but I have only ever used that when adding employer contributions to the total. Was not sure how this should/could be handled since I have never had a client actually go through with a request like this. 2 - Similarly, the Form 5500 will reflect the amounts that were in there on 12/31/22 since this is done on a cash basis. So do their quarterly statements. Should any of this be updated or should it all be left as-is? It's just a glaring issue in an audit and I am fine with that as the client signed off understanding they need to own everything that comes with the request. 3 - The reversal that was processed was for exactly $20,500 and all earnings/dividends remained in the plan. Thoughts on how this should be handled? Their letter of direction stated the exact amount versus making it all look like it never happened but, again, such an obvious issue if looked into. Thanks!

I apologize in advance if I've missed something in my cursory research of this, but here goes. Also, for simplicity I am assuming the employer in question only has DC plans, but I don't think that makes a difference. Clearly, to determine whether a plan is top-heavy for a "plan year" you use account balances as of the "determination date," which also quite clearly is the last day of the plan year preceding the plan year for which the determination of top-heaviness, or not, is being made. E.g., to determine whether a plan is top-heavy for a calendar year 2019 plan year, you use balances as of 12/31/2018. There are potentially also certain addbacks to determination date account balances of keys and nonkeys for distributions that were made during the plan year preceding the year for which the top-heavy determination is made (i.e., in my example, during 2018 for the 2019 top-heaviness determination), or potentially during a 5-year period in the case of some distributions. See IRC secs. 416(g)(1), (3), and (4)(C). And of course you have aggregation rules. So the above gives you your key and non-key participant balances for purposes of determining whether more than 60% belong to keys. But then you have to figure out whether those balances belong to keys or non-keys. IRC sec. 416(I)(1) [Note: the "I" in 416(I)(1) should be lower-case, but I can't make that happen; sorry] tells you that the keys are the folks who meet certain requirements, e.g. percentage of ownership of the employer, "at any time during the plan year." Just looking at 416(I)(1) [see previous note], it would seem that the "plan year" being referred to for identifying keys is the current plan year, i.e. the year for which you are making the top-heavy determination, i.e. 2019 in my example. At least, that's what I think, because 416(g)(1) tells you that a plan is top-heavy "with respect to any plan year," and to me, when 416(I)(1) says "during the plan year," they are talking about the same plan year. So it seems to me that based on the statutory language you would use ownership and compensation in 2019 to determine who are your keys and non-keys, and then you would go back to 12/31/2018 to see what those folks' determined to be keys based on their 2019 facts had in the plan for purposes of the "more than 60%" test. But Treas. reg. 1.416-1, T-12 seems to say pretty clearly that the "plan year" being referred to in 416(I)(1) is not the plan year for which you are making the determination (i.e., 2019 in my example), but rather 2018. It does this by adding "containing the determination date" to 416(I)(1)'s simpler "plan year." I guess when, before EGTRRA, you looked back 5 years to determine who were your keys (i.e., the keys were participants who at any time during "the plan year or any of the 4 preceding plan years" met one of the status tests), and under pre-EGTRRA Section 416(g) you were also dragging back in all distributions made during the 5 plan years ending on the determination date, it may have made sense for the IRS to want the same 5 year period for both purposes, i.e., the IRS may have been trying to simplify. But if that was the reason for departing from what otherwise seems the very plain statutory language of 416(I)(1), it no longer seems valid, since using balances as of the end of the previous year, and status as of any time in the current year, seems just as easy to do now. Has anyone else had an issue with this? To anyone's knowledge, has the IRS ever commented on this, formally or informally?

We have a key employee (5% owner) whose wife passed in late 2014. He took distribution of her account balance in 2015 and rolled it over within the same plan. Would the distribution from her account to his be considered a "related" rollover for calculating top-heavy status as the $ remains in the plan? If yes, would it drop off after 1 year?

DB/DC combination. Eligible Employee (HCE, but not key) enters both plans 1-1-2016. They accrue benefits for 2016. Now, both plans are amended to exclude this HCE (but not key) by classification effective 1-1-2017. Not eligible for deferrals, match, PS or anything, and not eligible for DB. The plans are not frozen. Owners and NHCEs and other HCEs are still eligible and accruing in both plans. A colleague is arguing that continuing additional top-heavy minimums must be accrued even after 2016 by this HCE even though they are fully excluded, assuming they meet the top heavy accrual requirement (1000 hours for DB or last day for DC). Based on grey book 2001-35. The written plan language appears to require the participant be an eligible employee to earn a TH minimum accrual. Essentially meaning they must earn a top-heavy year of participation to accrue additional top heavy minimum accruals. If they are now excluded by class, they can't earn any more years of top-heavy participation. My colleague states that this HCE became a "participant" on 1-1-2016 and that fact requires the plan to provide top-heavy minimums to comply with the law/guidance, since they are still a "participant" with accounts and/or benefit accruals from the 2016 plan year. The document might not have a formula for them for any more normal accruals, but the plan would not meet the law’s requirements if the top-heavy minimum was not provided, causing a qualification issue. Your thoughts on this?