DB DC combo question regarding Top Heavy

[Earl]

Client has a DB Plan, has no employees, so its Top Heavy....

Hires his first employee and wants to have an immediate eligiblity 401(k) plan.

The DB plan contribution exceeds 25% of pay so how does the TH min work? the DB plan has a 2 year wait so the new employee will not be eligible until 01/01/07 so there is the 2004, 2005 & 2006 TH min to worry about.

Seems like the client has to make a non-deductible contribution and that an excise tax would apply.

Can you specify that the employee is eligible for only a TH min accrual in the DB plan for 2004, 2005 & 2006? If he quits in 2005 he has 2 years of 100% vested TH accruals in a plan he never entered?

Thanks for any ideas or information.

[Guest DFerrare]

The excise tax may not apply. See Internal Revenue Code section 4972©(6).

[Effen]

Is the owner participating in the 401(k)? You said he "wants to have an immediate eligibility 401(k) plan." If the owner isn't eligible to participate in the 401(k), I don't think you have any issues since you wouldn't need to aggregate it w. the CB for TH. Therefore, you don't need to give the ee a TH min.

If that isn't the case, your plan documents are suppose to define which plan is dominant if you have more than one. If the DC is dominant, than I think you need to give it to him and it's most likely not deductible.

If DB is dominant, possibly amend the CB to let him in so that he gets the TH min in the CB plan. I believe this would be ok under APRSC, but I'm not sure.

[Earl]

Great - He wants to have the 401k for the employee. He would like to defer if possible but I can just tell him he can't till 2007, no problem there.

If I exclude Keys from the 401k no aggregation is required for TH. Then I can amend and let him in when the employee is in the DB Plan.

If the 3% is not deductible and there is no excise tax, is it never deductible?

If the DB Plan is terminated 12/31/06 before the EE enters (and convert to PS for 2007), maybe I can delay the deposit of the 2005 and 2006 TH until 2007 and deduct them in 2007 with the PS (assuming 2007 PS is < 25% of elig pay)?

Sound like a plan?

I guess I need to research timing requirements for TH min deposits (and the excise tax exemption reference).

Thanks alot for this. It is very helpful.

[AndyH]

Earl, when the NHCE becomes eligible for the DB plan give him the top heavy minimum in the DB plan, not the DC plan. And then it is deductible. The deferrals are no longer an issue for deductibility.