Top Heavy Minimum Benefit

[James Matt Ullakko]

I am asking for someone's help clarifying some of my interpretations regarding minimum benefits for all Top Heavy defined contribution plans for which a participant is covered.

And I have a couple of questions following...

We are testing a companies' Profit Sharing and Money Purchase Plan. These are paired plans. If I interpret correctly the minimum benefit for all defined contribution plans maintained by an employer is 3%. So, if someone is covered under more than one Top Heavy Defined Contribution Plan the minimum benefit is satisfied by either the non-elective cont. in Profit sharing plan or the required cont. in the MP Plan, provided it is at least 3%.

It is not required for each plan to make 3% cont.

1. So, is it always the case that the 3% minimum can be satisfied in either the MPP or the Profit Sharing Plan for any year in which either plan is Top Heavy?

2. Does it need to be stated clearly in Plan Document which plan the minimum benefit will be allocated provided either or both paired plans are Top Heavy?

What does it really mean to have a paired plan? Are there some kind of testing advantages for having paired plan or is this just a referrence type of notation indicating that the plans are maintained by the same employer?

Any help is much appreciated!

[Guest MES]

Usually the plan documents will state which plan will satisfy the top heavy minimum requirement. If it's stated in the document, you must follow its terms. But you are correct, the top heavy minimum is only required in one plan.

The big advantage of paired plans is deductibility. The deductibility limit on a profit-sharing plan is 15%, but when you pair it with a money purchase, you can increase the limit to 25% (by making a 10% MP contribution). Since the deductibility limits Code section 404 have been increased by the recent legislation, many have commented that there will no longer be a need for paired plans. There may be a big downfall in the amount of money purchase plans, since the same contribution will be able to be made and be deductible in a profit-sharing plan as a result of this change, and the p/s plan would not be subject to the minimum funding standards, unlike the money purchase.

Hope this helps somewhat.

[James Matt Ullakko]

Thank you much, that certainly helps me understand the "money purchase plans may be obsolete" phase going around lately.

Thanks.

[Bob R]

Actually "pairing" is a special term used for prototype plans. As pointed out, a participant is only required to get the top heavy out of one plan. And, all plans are required to include top heavy provisions (except for govt. plans). So, if an employer had both a p/s and a m/p plan, and no special language was provided, both plans would state that the top heavy minimum would need to be provided (i.e., a participant would get 3% out of each plan). But, if the employer only wants to give one top heavy minimum, then the plans need to be coordinated. Typically the p/s plan would state that if somone is in a plan where there is a required contribution (i.e., a money purchase plan), then the top heavy will be provided in that plan rather than the p/s plan. And, the money purchase will provide that if someone is in both plans, that it will provide the minimum. Thus, both plans are coordinated to provide that the top heavy minimum will only be provided in the money purchase plan.

Now, you throw into the mix the fact that an employer is using a standardized prototype. The general rule is that an emloyer can rely on the opinion letter issued to the sponsor. The exception is that there is no automatic reliance if the employer maintains two plans -- unless those plans are "paired." If both plans are "paired" then the employer has automatic reliance on both of the plans. "Paired" plans are standardized adoption agreements (of the same sponsor) that include top heavy (and 415) coordinating language. Because that coordination is built into the plan, the IRS can give the automatic reliance. For example, what if a p/s plan were drafted to provide that the m/p plan will provide the top heavy benefit and the m/p is drafted to state that the p/s will provide the minimum? You then have no minimum and a qualification problem. That's why the IRS wants to review plans that don't include the automatic coordinating language (i.e., the "pairing" provisions).

As mentioned, this issue will go away once m/p plans go away. (Also, the IRS is going to provide automatic reliance to non-standardized plans (guidance will be issued on this in the next several weeks)).

[James Matt Ullakko]

Thank you for the insight, you are reading right into my situation perfectly. I have not found any languange giving guidance on which plan would satisfy the minimum allocation, but at least that means that neither is stating that the benefit will be satisfied in the other! That sounds like a major design problem. Once again, thank you for your knowledge.

Matt

[david rigby]

Well, a little clarification.

All qualified plans are aggregated for purposes of determining top-heavy status if the plans contain common Key Employees. This is called a Required Aggregation Group. All plans within the group are top-heavy or not top-heavy. That is, if they are aggregated, there is only one test, and (this is important) the top-heavy ratio of each plan is irrelevant.

As stated above, the top-heavy minimum benefit can be provided by any one of the plans in the group, or in some combination. Equally important, all plans in the group must provide T-H vesting even if the minimum benefit is provided in a different plan.

[Earl]

Money Purchase Plan lives!!! Read all about it!!!!

I am continuing to maintain a Money Purchase Plan for select NHCEs that want a 25% (actually max contrib.) contribution. It provides immed. elig and 100% vesting, unlike my Profit Sharing/401(k) plan. Since I reduced their salary by 20% I actually saved... taxes and PS contrib.

Interestingly, it seems that that group can now participate in the 401(k) as well next year as they will not be at their 415 limit any longer. Seems I must take action to exclude their job title from the PS plan, if I don't want to fund for them additional amounts.

Could I make eligible for 401(k) and inelig for PS? Answer is probably not in a prototype document.

Any thoughts on this?