top heavy minimum - 2 plans with different years

[AndyH]

Company has an off calendar DB plan and a calendar K plan. Call the DB plan 7/1/2005 to 6/30/2006.

The plans are top heavy and the documents say that the DB provides the minimum.

Which year goes with which year for top heavy minimums? Or does something say that the differing years make this arrangement impossible?

The DB was recently frozen so this is a real issue.

The aggregation rules for testing are clearly defined in 1.416, but I have not as yet found anything that correlates the minimum benefits.

Anybody have a cite? Thanks.

[Guest Carol the Writer]

I believe there is a provision in the Plan document - in your case the DB plan - that would specify the valuation date for top-heavy purposes, and this (whether it is the first day of the PY or the last day) would govern when the TH minimum accrues. I think that's right, anyway. That's how the Datair documents are set up, so that is my experience. Thanks! Carol Caruthers, MSPA, EA

[SoCalActuary]

The IRS has given clear (if informal) guidance here.

You chose in the past to provide the TH min's in the DB plan, and put it in the plan language.

Now, the DB plan is frozen. You need to amend your documents, otherwise you are not complying

with TH rules. If the DB will continue providing TH min's, then the plan is not really frozen,

but you can continue to have the benefits there. Otherwise, you must also amend your 401(k) document, and provide the minimums there.

[AndyH]

Pehaps the question is unclear. The DC plan says that if a non key participant is in a DB and a DC, then the DB plan provides the top heavy minimum; otherwise the minimum is provided in the DC. All of a sudden, the DB is frozen and the DC plan must provide minimums because the DC plan no longer is. The question is one of transition.

What DB plan year (7/1 to 6/30) satisfies the top heavy minimum that would otherwise be requird to the DC plan for 2005? 2006?

[Guest greybeard]

What happens to the DB participant if it has either accrued more than 20% of Average Compensation or had 10 years of participation and has been maxed out for the TH minimum?

Should the participant now get a DC minimum for the remaining years?

[Blinky the 3-eyed Fish]

Andy, this is a very interesting question. Before delving further, how was the plan operated in the past?What DB accrual went with what DC year?

Greybeard, regarding your question, ongoing DB and DC participants could be capped at 10 YOP and require no further TH minimums. In this case though, with a frozen DB, you no longer have multiple participation and would seemingly need to provide the DC TH minimum of 3%.

[AndyH]

Blinky, it is a takeover. How has it been operated? In short, incorrectly. One of those deals where one firm handles the DB and the other handles the DC. The DC tester reported it to be not top heavy. The DB plan, which was the first plan and covered the same people, was not included in the DC test.

And the DB firm was one of the international firms that have apparently never seen a top heavy plan because they cited top heavy status based upon the current valuation pvab (no lookback, no distributions, no determination date) using funding assumptions which of course bear little resemblance to the ones that the document say must be used for top heavy testing. But they did say it was top heavy so they got that part correct.

So, in short, past practice in this case is not helpful.

To add insult to injury, the k plan has a 3 month eligibility period, so there most likely were overlooked top heavy minimums due on account of that over the years. But for now I'm just trying to focus on the most pressing question, which is for which years are DC minimums due.

Thanks for all comments. Carol, the DB is custom, but your suggestion of looking to prototypes (or even LRM's) may be useful, thanks.

[John Feldt ERPA CPC QPA]

I agree with Carol's point. If your plans do not contain language, however, then you should try to administer it in the same way it started out. However, the regulations talk about aggregating plans where the determination dates fall within the same calendar year:

1.416-1, T-6 Q&A: "the required aggregation group includes each plan of the employer in which a key employee participates in the plan year containing the determination date".

1.416-1, T-22 Q&A: "The determination date with respect to a plan year is defined in section 416(g)(4)© as (1) the last day of the preceding plan year, or (2) in the case of the first plan year, the last day of such plan year."

1.416-1, T-23 Q&A: "When two or more plans constitute an aggregation group in accordance with section 416(g)(2), the following procedures are used to determine whether the plans are top-heavy for a particular plan year. First, the present value of the accrued benefits (including distributions for key employees and all employees) is determined separately for each plan as of each plan's determination date. The plans are then aggregated by adding together the results for each plan as of the determination dates for such plans that fall within the same calendar year."

OK, so at this point, we've put the two plans together to run the TH test, and let's say the result is top heavy. If this was the first year for both plans, (and they are required to be aggregated) then there is no question about the TH minimum: if one plan says that it will provide it, then that first plan year must provide a TH minimum. If both plans say they will provide it, then they both provide the TH minimum in the first year (and a search for a new plan design consultant is initiated - just kidding).

With that in mind, follow to the next year. What must happen if the second TH test shows the plans are top heavy? Follow this langauge again, and so on until you reach your current year.

Even if the plans were not set up at the same time, then the same approach applies, by using the determination dates that end in the same calendar year for the aggregation. For example, a 6/30/2005 determination date and a 12/31/2005 determination date are used for testing Top heavy. If the result is TH, that means the 7/1/2005 plan year and the 1/1/2006 plan years are top heavy. The plan language will then dictate which plan (or plans) have to giev a TH minimum for that plan year.

Well, that's what I think should work. I hope this helps.

-John

[AndyH]

Thanks for the comments.