DB/Dc Offset Top Heavy Question

[AndyH]

Takeover DB and DC plans that are top heavy. DC Plan document say top heavy is satisfied by 5% alloc to DC plan. DB plan says same thing. Prior actuary says top heavy provided in DB but offset by pv of dc contributions. Prior actuary produces DB document page that supports such a statement, but this is filled in language that does not provide the specifics. Zero confidence in credibility of past work.

How exactly should this calculation be done? Plan is being terminated and satisfaction of top heavy minimums is in doubt. And plan is very underfunded.

Possible methods

(1) Should the top heavy minimum be calculated each year, and a db supplement added to sustain a minimum 2% accrual for each top heavy year, measured year by year?

Or, (2) can we skip ahead to today and make sure that the cumulative DC contributions projected at some interest rate would exceed 2% x YOTHS?

Or (3) can we take the post-1983 account balance and calculate the equivalent accrual rate of that, which would effectively substitute actual investment performance from any actuarial equivalence definition and mask any years that DC contributions were not made?

Opinions please. Thanks.

[Penman2006]

Andy,

If the document provisions for benefit accruals or contributions were not followed, any way that you fix that problem other than with IRS blessing means you are winging it just like the actuary that you say has no credibility. Maybe one of your proposed methods of correction will satisfy the IRS and no additional accruals or contributions would be required or maybe they would say "follow the doc, put in 5%/yr. plus interest".

[Kirk Maldonado]

The prior actuary's methodology for satisfing the minimum contributions or benefits was stated to be:

Prior actuary says top heavy provided in DB but offset by pv of dc contributions.

Is that kosher? I've not encountered it before, but I must confess that I've not researched it to see if it is acceptable.

[david rigby]

I think the most important thing is credibility in the document, rather than the prior actuary. You say the DB document says one thing, but the prior actuary produces something else. Find out which is correct.

[Penman2006]

Kirk,

That is an acceptable method. Look at Q&A M-12 of the 416 regs. Basically you convert the DC contribution to an equivalent benefit and use that to offset the 2% DB requirement.

[AndyH]

Thanks, you beat me to the cite.

Although I accept the comments about the document as good advice, I am not stupid; but resolving the document question will be somebody else's decision-I am asked to help with the mechanics of the offset calc itself; I cannot rule out the possibility that the plan was properly amended at some point and that the client did not forward to us the most recent document. I added the background only to head off the inevitable question of what was done before, to which my comment is that what was done before may not resemble what should have been done.

I Still could use opinions on the calc itself. Thanks.

[Kirk Maldonado]

Penman 2006:

Thanks for the cite. Your explanation makes sense to me as a non-actuary. Perhaps the description given by AndyH is technically correct, but it doesn't have the same connotation to me. In any event, here is the relevant language from the regulations:

M-12 Q. What minimum contribution or benefit must be received by a non-key employee who participates in a top-heavy plan?

A. In the case of an employer maintaining only one plan, if such plan is a defined benefit plan, each non-key employee covered by that plan must receive the defined benefit minimum. If such plan is a defined contribution plan (including a target benefit plan), each non-key employee covered by the plan must receive the defined contribution minimum. In the case of an employer who maintains more than one plan, employees covered under only the defined benefit plan must receive the defined benefit minimum. Employees covered under only the defined contribution plan must receive the defined contribution minimum. In the case of employees covered under both defined benefit and defined contribution plans, the rules are more complicated. Section 416(f) precludes, in the case of employees covered under both defined benefit and defined contribution plans, either required duplication or inappropriate omission. Therefore, such employees need not receive both the defined benefit and the defined contribution minimums.

There are four safe harbor rules a plan may use in determining which minimum must be provided to a non-key employee who is covered by both defined benefit and defined contribution plans. Since the defined benefit minimums are generally more valuable, if each employee covered under both a top-heavy defined benefit plan and a top-heavy defined contribution plan receives the defined benefit minimum, the defined benefit and defined contribution minimums will be satisfied. Another approach that may be used is a floor offset approach (see Rev. Rul. 76-259, 1976-2 C.B. 111) under which the defined benefit minimum is provided in the defined benefit plan and is offset by the benefits provided under the defined contribution plan. Another approach that may be used in the case of employees covered under both defined benefit and defined contribution plans is to prove, using a comparability analysis (see Rev. Rul. 81-202, 1981-2 C.B. 93) that the plans are providing benefits at least equal to the defined benefit minimum. Finally, in order to preclude the cost of providing the defined benefit minimum alone, the complexity of a floor offset plan and the annual fluctuation of a comparability analysis, a safe haven minimum defined contribution is being provided. If the contributions and forfeitures under the defined contribution plan equal 5% of compensation for each plan year the plan is top-heavy, such minimum will be presumed to satisfy the section 416 minimums.