Top Heavy DB plan

[Lori Foresz]

We have a DB plan that was frozen in 2003 because an older employee would become eligible for the plan and the cost would be too high. The plan is top heavy as the only eligible participants (prior to the employee becoming eligible) were the owners.

The plan had a 2 YOS wait. We are now being told that the employee needs to accrue top heavy minimums for 2001 and 2002 since she worked over 1,000 hours. So, even though the plan was frozen for all periods since her DOP, she is still due a top heavy benefit for the year.

Can someone confirm that this is true and provide some rationale? I would think that top heavy accruals wouldn't start until she actually enters the plan, but I may be wrong. DB plans are not my forte.

Thanks for any and all help!

[david rigby]

Might need to carefully review what you mean by "...frozen in 2003..."

I believe that EGTRRA changed the rules so that frozen DB plans need not provide additional TH accruals. Probably some other discussion can be located with the Search feature. For example,

http://www.benefitslink.com/boards/index.php?showtopic=20512

[imchipbrown]

M-4 Q. Which employees must accrue a minimum benefit in a top-heavy defined benefit plan?

A. Each non-key employee who is a participant in a top-heavy defined benefit plan and who has at least one thousand hours of service (or equivalent service as determined under Department of Labor regulations, 29 CFR 2530.200b-3) for an accrual computation period must accrue a minimum benefit in a top-heavy defined benefit plan for that accrual computation period. If the accrual computation period does not coincide with the plan year, a minimum benefit must be provided, if required, for both accrual periods within the top-heavy plan year. For a top-heavy plan that does not base accruals on accrual computation periods, minimum benefits must be credited for all periods of service required to be credited for benefit accrual. (See §1.410(a)-7). A non-key employee may not fail to accrue a minimum benefit merely because the employee was not employed on a specified date. Similarly, a non-key employee may not fail to accrue a minimum benefit because either (1) an employee is excluded from participation (or accrues no benefit) merely because the employee's compensation is less than a stated amount, or (2) the employee is excluded from participation (or accrues no benefit) merely because of a failure to make mandatory employee contributions.

[WDIK]

I think that a plan can be more generous than only providing top-heavy minimum benefits for years of participation, as required in the cite above. Is it the plan document that defines the top-heavy benefit as including all years of service?

[imchipbrown]

Indeed. Our prototype lets you go either way.

[AndyH]

True, but the facts of this particular situation are not clear. The timing of the date of participation and freeze are not clear. The language in the freeze resolution and the timing and language of an EGTRRA amendment are relevant. Then of course the language in the document governing whether regular and top heavy benefits are based upon service or participation are relevant.

So the answer is, it depends. Much more detail is needed to answer the question.

[Lori Foresz]

Hi,

Thanks everyone. The amendment was to freeze accruals as of 6/30/2003 including top heavy minmum benefits. The only participants in the plan from 1/1/03 thru the freeze date were Key Employees. They did not accrue additional benefits during 2003.

The top heavy minimum benefit is based on years of participation, but the actuary is telling us that even though she wasn't a participant during 2001 and 2002, she still needs to accrue a top heavy minimum bnefit for those years when she comes into the plan on 7/1/03. (since the plan is frozen not terminated). It would seem that top heavy minmum benefits would only accrue when she actually becomes a participant and that the only accrual would be for that year not prior years, but I must be misunderstanding this.

It seems so strange to me and we were all surprised. This is a crazy business.

[AndyH]

Something appears to be very wrong with your situation, possibly including the answers you are being given. I suggest that you obtain an independent second opinion or consult with an ERISA attorney on the issues surrounding this participant as well as the application of the EGTRRA changes.

[Blinky the 3-eyed Fish]

When was the EGTRRA amendment adopted and can you confirm that it has the language that no longer requires a frozen DB plan to provide TH minimum benefits? If it was adopted on or after 7/1/2003 and your document provides TH minimums for all years of service (you already stated it was years of participation), then I understand the actuary's answer. Otherwise you may want the actuary to walk you through it again.

[AndyH]

lgolden, in the future it would be more courteous if you provided more facts if you are looking for help. You still have not provided sufficient facts to allow an answer to your question.