Restricted Benefits under a DB plan

[Guest meggie]

I have been back and forth with this issue. This question has to do with the definition of restricted employee under 1.401(a)(4)-5(b).

Is it true that the "high 25" highly compensated employees and former employees are determined on a controlled group basis for purposes of this restriction? If true, then even if a plan is severely underfunded, the HCEs in the plan may still be able to take an unrestricted lump sum (that is, if the plan offers large lump sums) as long they are not part of the highest 25 within the controlled group?

Thanks.

[Blinky the 3-eyed Fish]

Because the reg. references the highest paid 25 nonexcludable HCE's, the definition of restricted employee would include all nonexcludable members of the controlled group. That is my literal interpretation.

What doesn't make sense is that this regulation is designed to protect the assets of the DB plan from being raided by the HCE's, leaving the NHCE's shorted. By including members of the controlled group in the restricted employee definition, who very well may not be participants in the plan, there is that chance that the 25 highest paid will be outside of the company sponsoring the plan. This would leave the NHCE's without the protection this rule is designed to have.

But sometimes these regs don't make total sense, so I have to go with what is says, not what I interpret the meaning to be.