Restricted Employee?

[AndyH]

DB plan is funded less than 110% on current liability basis (by any measurement). Former highly paid participant terminated in 1998, reaches NRD in 2003, wants lump sum. Participant was an HCE when he left, about the 10th highest paid.

Can somebody clarify the rules for former HCE's for me?

Here is the language in 1.401(a)(4)-5(B)(3)(ii):

(ii) Restricted Employee Defined.

For purposes of this paragraph (B), the term restricted employee generally means any HCE or former HCE. However, an HCE or former HCE need not be treated as a resticted employee in the current year if the HCE or former HCE is not one of the 25 (or a larger number chosen by the employer) nonexcludable employees or former employees of the employer with the largest amount of compensation in the current or any prior year......"

I'd like to understand the intent of the second sentence. My former HCE obviously has no compensation in the current year. How is this to be interpreted?

Does this just mean that he had to be out of the top 25 every year?

Thanks for any help.

[MGB]

You look at the highest compensations in all years (not just the current). Choose the 25 highest people. If he is in that group, he is still restricted.

What they are trying to say is that he could drop out of the high 25 if new compensation amounts by anyone are higher than the compensation that put him in the high 25. For example, a person could be restricted when they retire, but are no longer restricted the following year because there are enough new HCEs with compensation that is higher than the person's formerly highest compensation, resulting in the person getting bumped out of the high 25 for the current year.

At the recent CCA meeting, Holland started going off in a tangent in trying to delineate between those still in the plan and those that are not (e.g., prior lump sums) and claiming you only count the 25 that still have benefits under the plan (whether or not current or former). It was more "discussion" than fact, so I don't know if I agree with him on this.

[AndyH]

Thank you. Your interpretation (and Hollands) differ from the first two that we were inclined to choose from. But reading it again, I can see that interpretation clearly.