Top Heavy Minimums and Excluded Classes of Employees

[mwyatt]

Recently had a plan brought to my attention that is top heavy and also provides that a certain class of employees is excluded from participation. The question is whether these employees who would otherwise be eligible to enter the Plan (over 21 and completed 1 Year of Service) but for their employment classification have to receive the top heavy minimum contribution. The top heavy regs drafted back in 1984 mention that employees barred from participating due to level of compensation (the old "excess-only" plan) or who are not electing to defer (401(k) plan) must receive the top heavy minimum; they don't mention employees in excluded classes of employment who are not participants. What are peoples' thoughts on this situation (admittedly pretty rare as most TH plans usually are of such small size that exclusions would probably run into ongoing 410(B) problems).

[mwyatt]

Hello; thought I'd bring this question back up for discussion (no answers before). This was just brought to mind because of a plan that wanted to exclude a certain class of HCEs (who are NOT key employees) from participation in a profit sharing plan. Say that excluded class does not cause problems with 401(a)(4), etc. Only issue is whether they should get the top-heavy minimum. (OR if the HCE point is confusing the issue, say a plan states that a certain class of rank and file employees is excluded from participation). Reading TH regs as previously mentioned, wouldn't the position that they don't get the TH minimum seem to fly in the spirit of "top heavy regs drafted back in 1984 mention that employees barred from participating due to level of compensation (the old "excess-only" plan) or who are not electing to defer (401(k) plan) must receive the top heavy minimum"?

Thanks for any insight (or even better, a cite for your position ).

[Everett Moreland]

IRS Handbook 7.7.1, Employee Plans Examination Guidelines, Chapter 5, Top-Heavy Plans, 5.3.2, 3.C. (3/11/98):

"In determining the applicable percentage, a defined benefit plan may disregard a year of service . . . for an employer in which the employee did not participate in the plan, unless the employee received an accrual in that year. See IRC 416©(1)©(i)."

IRS Q&A from 2000 ASPA Annual Conference:

"15. If a Plan is Top Heavy and employer decides that they would like to begin excluding commissioned employees, and the numbers work out so that the Plan passes §410(B) - or general testing, without a contribution allocation to commissioned employees, and some commissioned employees were eligible for the plan prior to the amendment, will commissioned employees who have already become eligible for the Plan, but who are no longer an eligible class of employees due to redefinition be required to receive a Top Heavy contribution allocation?

"In the year of change a top-heavy minimum will be required. In subsequent years a top-heavy minimum would likely not be required in a defined contribution setting. In a defined benefit setting this would be more problematic."

[mwyatt]

Thanks for the reply, Everett. From the examination guidelines, this seems to read that you could ignore service while not a participant in the Plan if no accrual was granted for normal benefit purposes in that year. This doesn't seem to be a problem as employees excluded from participation would ordinarily be credited with service for eligibility (in case of leaving excluded class somewhere down the road) and vesting purposes, but not for accrual purposes. Although then I guess one would need to be careful in a DB setting if excluding certain classes and using Years of Service rather than Years of Participation for accrual purposes... hold that thought. My reading is that you can exclude YOS while not a participant from TH purposes if and only if accrual is based on participation, rather than service as an employee. Don't see how you get around that (and it is interesting that this guideline really is not supported anywhere in the 416 regulations, which make no distinction between service prior to entry, only service when the plan is or isn't top heavy).

As to the ASPA Q&A, looks like (Wickersham or Holland maybe?) someone really didn't want to go out on a limb (or answer the question definitely).

Thanks for the input.