Top Heavy Minimum under EGTRRA

[AndyH]

In 2002, a client sponsors top heavy DB and K plans and froze the DB accruals. Aggregated plans are still top heavy.

1. Is a top heavy minimum of 3% or 5% required in the k plan?

2. If the k plan adds a 3% safe harbor nonelective contribution, does this satisfy the top heavy minimum for both plans?

3. Somebody in my office thinks there's a glitch in EGTRRA pertaining to a DB frozen plan, whereby top heavy service is frozen but not the determination of average comp for purposes of the top heavy accrual. Anybody noticed this?

[Mike Preston]

My guess would be 3%. And I don't think it is a glitch. I think that is the way it has always been. If someone has a top-heavy minimum benefit of 2% of high-5, then that benefit is 2% of high-5, whenever the high-5 is determined. If you truly want to freeze it, you have to terminate the plan and pay it out.

[AndyH]

Thanks for your comments, Mike.

To me, if this wasn't an oversight then it's real fine print.

I predict considerable non-compliance with this. I haven't read anything that says that post-EGTRRA top heavy accruals must continue to reflect compensation after the "freeze" date.

This change in the law could just as easily have ceased compensation as well as service measurement at the freeze date. I don't understand the logic to this. Why isn't a freeze a freeze?

Here's what ASPA's summary said, "A frozen top heavy defined benefit plan will no longer be required to make minimum accruals on behalf of non-key employees."

It seems to me that there should have been a "...but...."!

[Mike Preston]

I think it depends on the language of the statute. The original statute (before EGTRRA) worked this way, so I don't think the IRS is doing anything unusual with the way they are implementing it, if I understand what they are doing.

The language means that there will no longer be any top-heavy accruals. But the old top-heavy accruals don't get less valuable just because of the law change.

Maybe instead of a "but", there could have been the word "new" between "make" and "minimum".

[AndyH]

Maybe it's me, but this strikes me a little like "No new taxes", (but we're still going to raise the old ones).