Participation & Top Heavy Requirements

[Guest jgordon]

I need some help on figuring out whether certain employees are considered participants for top heavy purposes. Let's say that the eligibility for a plan is "employee who is a member of the sales team". For two years employee satisfies the participation requirements and participates in the plan. In year three employee becomes a manager and is no longer a member of the sales team. However, employee has not terminated employment with sponsoring employer. Has employee's participation terminated? Is employee still required to receive top heavy minimums if plan becomes top heavy? Citation would be helpful, if available. thanks in advance.

[R. Butler]

Participant is defined in the plan document. If employee is a member of an excluded class for the entire year he is not a participant & not entitled to top heavy minimum.

When did employee become a member of excluded class? Was it during year 3 or prior to the start of year 3?

[Guest M. Martin]

The timing of this question is perfect as I have the same situation and was going to post a similar topic.

In this instance, the participant was eligible for the 401(k) portion of the plan, not eligible for the profit sharing portion and had received a top heavy min. contribution in the past. Mid-2003 his status changed and he became an excluded category of employee. My client thinks the participant should be treated the same as a terminated employee and excluded from receiving a TH min. contribution for 2003 (his reasoning is partially because the participant is 0% vested the contribution would eventually be forfeited anyways).

I think the participant should receive the min. contribution for 2003 (irregardless of his vesting) and will be excluded from receiving a contribution in the future so long as his status remains the same.

In the plan document (Corbel) definition of "Participant" means any Eligible Employee who has satisfied the requirements of Sec. 3.2 and has not for any reason become ineligible to participate further in the Plan.

"Former Participant" means a person who has been a Participant, but who has ceased to be a Participant for any reason.

Should this participant be included or excluded for 2003?

[R. Butler]

the participant was eligible for the 401(k) portion of the plan, not eligible for the profit sharing portion and had received a top heavy min. contribution in the past. Mid-2003 his status changed and he became an excluded category of employee. My client thinks the participant should be treated the same as a terminated employee and excluded from receiving a TH min. contribution for 2003 (his reasoning is partially because the participant is 0% vested the contribution would eventually be forfeited anyways).

I think the participant should receive the min. contribution for 2003 (irregardless of his vesting) and will be excluded from receiving a contribution in the future so long as his status remains the same.

My understanding is the same as yours.

[Guest jgordon]

I think I may have an answer to my own questions . . . but I would like to get some input on my line of thinking.

Although participant is not defined in the IRC it is defined in ERISA as an employee or former employee who is or may become eligible to receive a benefit of any type from an employee benefit plan. Therefore, even if an employee no longer satisfies the elgibility requirements as long as the employee may receive a benefit the employee is still a participant. In addition, I do not see how no longer qualifying for eligibility results in a distributable event that would stop vesting.

416 requires that every participant receives a top heavy minimum. Therefore, as long as the employee has an account that is vesting in a plan such employee is a participant required to revceive top heavy minimum.

I think the code alludes to this result where it states that even if an employee does not have 1000 hours such employee is required to receive a top heavy minimum. If 1000 hours is a requirement for participation and an employee does not receive then still required to have top heavy minimum even though not meeting eligibility requirement.

Is this flawed thinking/reasoning in any way? Any thoughts or opinions destroying the reasoning above would be great (I do not want the above to be the result. If so, I am about to have a very unpleasent conversation with a client).

[R. Butler]

I disagree with your final reasoning. Employee would not be entitled to a top-heavy minimum if employee was a member of excluded class for the entire year. Your reasoning would lead to a different result.

I would agree that participant would be entitled to top-heavy minimum in Year 1 if employee switched to an ineligible category during Year 1. That employee would have been eligible to receive a benefit during Year 1 & is still employed at the end of year one.

[Guest jgordon]

R. Butler,

Why? What is the basis for your position that excluded employee not entitiled to top heavy minimums? All I know is that 416 states all participants must receive top heavy minimum and that participant is not defined in Code but is defined in ERISA. Help me out with understanding why you believe that excluded employee is not required to receive top heavy minimum.

Thanks in advance.

[rcline46]

I do not think said employee is entitled to a TH contribution.

Reason - I do not think that the change to an ineligible class in the current year is any different to having changed to an ineligible class in a prior year.

I view the 416 regs saying that if the ONLY reason a participant is not benefitting at the end of a year is due to lack of hours, they will receive the TH benefit anyway. This is not true with the aforementioned participant.

[R. Butler]

jgordon,

Participant is defined in the plan document. You have stated that per the document the employee is a member of an excluded class. Thus per the document, for accrual purposes the employee is not a participant. Now again it is my understanding the participant would have to been a member of the excluded class for the whole plan year to avoid the top heavy minimum. I do not equate excluded class with termination. If the employee was a participant during any part of the year, I would give the employee a top heavy minimum for that year

[Guest jgordon]

RButler,

I live in a very code oriented world (not by choice!). Although I agree with your final post, the question that will be put to me is where in the code does it say that a "participant" is defined by the plan document? And this is what started this whole problem to begin with. My original thought was "not eligible for participation = not a participant and not eligible for TH contribution". Question back to me was are we clear that participation can be ended in any other way than a distributable event? Then we get into an issue of active/inactive participants. But 416 does not say that active participants get TH contribution, it says participants. So the question becomes what is definition of participant. ERISA seems to define it. Where is the flaw in this thinking? Other than a position that employee is not a participant per plan document. Where is authority for that?

[rcline46]

Reg 1.416-1 m(10)

This lists the reasons you cannot use to not give a TH benefit.

Movement to an excluded class is not amoung the reasons.

Therefore, you can exclude from TH benefit because there is nothing that says you must INCLUDE them. It is so obvious that no specific reg need be written.

In my opinion of course.

[R. Butler]

I guess saying the employee was not a participant may have been poor wording. RCline's post is more accurate. Not all participants are necessarily entitled to receive an allocation. The document specifies the participants that must receive an allocation. As RCline states 1.416-1(m)(10) provides the following:

"M-10 Q. Which employees must receive the defined contribution

minimum?

A. Those non-key employees who are participants in a top-heavy

defined contribution plan who have not separated from service by the end

of the plan year must receive the defined contribution minimum. [bNon-key

employees who have become participants but who subsequently fail to

complete 1,000 hours of service (or the equivalent) for an accrual

computation period must receive the defined contribution minimum. A non-

key employee may not fail to receive a defined contribution minimum

because either (1) the 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 or, in the case of a cash or deferred

arrangement, elective contributions."

I just don't see that this reg. requires that members of excluded classes receive a top-heavy minimum.

Also , just in general I would be careful about using an ERISA definition to interpret an Internal Revenue Service regulation. I'm guesssing that the ERISA section you are citing probably does contain a provision that the deifiniton are for purposes of that Title, Ch., Section or something. Most definition type sections does contain such a statement. Thats not to say that in most cases that the IRS won't interpret the deifiniton simialrly, I just wanted automatically assume it.

[Guest jgordon]

Using that Regulation is where this all started. Please note that it states all non key employees who are participants who have not seperated from service by the end of the year are required to receive TH minimums. So it comes down to who is a participant and here is where the problem begins. The code does not provide a definition of participant. The reg you cited gave specific examples of when employees who were participants but subsequently fail to meet eligibility requirements must receive TH contributions. However by providing those situations does not mean that no other situation does not require TH minimums. I take that section to show the intent, that you cannot get around TH minimums by saying that an employee no longer meets elgibility for participation.

So I guess my question still remains . . . who is a participant? If you once were a participant are you always a participant as long as you have an account and are not separated from service. According to ERISA - yes. According to the Code - AGHHH!

Thanks for all your insight. I tend to agree, I just can't prove it (meaning no specific cite). Thanks once again

[Guest Judy S]

I have been following this post and I tend to agree with rcline46 that a good case could be made for not giving the employee a top heavy contribution for the year.

Sal Tripodi's book disagrees, however.

"If an employee has satisfied the plan's age and service requirements for eligibility, but is excluded for other reasons, such as a job classification, then the employee is not a participant in the plan and would not be entitled to the top heavy minimum allocation. This assumes the employee is excluded from the plan for the entire plan year (emphasis on entire plan year). This rule also assumes that the plan satisfies the coverage requirements under 410(b)."

It seems that the safest thing would be to give him the minimum, but I guess that should be the employer's call after giving him all the "facts" as they are known.