Top Heavy Minimum after being excluded?

[John Feldt ERPA CPC QPA]

A client with a Defined Benefit Plan wants to amend their plan to exclude an employee by name effective prospectively. This employee had entered the plan in 2001. The Plan started in 2000 and has always been top-heavy (and will continue to be top heavy). If the employee is excluded, we believe that the plan will still pass the 410 ratio percentage test for coverage, and they will pass 401(a)(26) for participation.

Can you think of any plan qualification problems that might occur doing an amendment like this?

Will this employee no longer be eligible to accrue any future top heavy minimum benefits?

Can his future compensation be excluded when considering his average pay for top heavy purposes?

Since the plan passes ratio percent, is it ok to exclude him by name, or does that not even matter?

Should the plan provide a 204(h) notice to this employee?

[FAPInJax]

Well, here is my two cents!

Can you think of any plan qualification problems that might occur doing an amendment like this?

No, as long as all the coverage and nondiscrimination rules still pass.

Will this employee no longer be eligible to accrue any future top heavy minimum benefits?

The employee may have to accrue additional TH benefits. This will depend on the plan definition (some plans are drafted so that a year of vested service would count as a year of TH)

Can his future compensation be excluded when considering his average pay for top heavy purposes?

I believe the answer to this is no. The years of credit may stop - for example, only 4 years of accrual credit at the date of exclusion. However, the compensations continue to be looked at for averaging but only applying the 4 years of credit.

Since the plan passes ratio percent, is it ok to exclude him by name, or does that not even matter?

Different people will debate whether to exclude by name or by job title, etc .

Should the plan provide a 204(h) notice to this employee?

Good question. It would appear that the cessation of benefit accrual might require the notice to be provided.

[Blinky the 3-eyed Fish]

As long as you are passing the ratio test for coverage, excluding by name is fine.

Being you are removing him from participation, I am of the opposite opinion that you do not need to continue providing compensation increases. Frank, why do you think this is necessary?

I would too follow the 204(h) guidelines just to be sure.

[FAPInJax]

Well, this was a debated subject many years ago.

The participant has 4 years of top heavy credit. The plan is still top heavy BUT the participant does not earn additional credits (for some reason). The regulations appear to just state that the average compensation is while the plan is top heavy (not whether the participant is receiving credit).

This was not a popular position at the time but I believe is the fair way to treat the participant.

IF the plan stops being top heavy then the years of compensation can be excluded.