Top heavy and excluded employees

[SteveH]

I am working on a DB plan design for a client.

It's Friday, I had to present to a medical society last night and they kept pouring wine, it's overcast out, and my brain just isn't working.

The client has many highly compensated employees. The make up is 1 owner, 9 other highly compensated employees, and 12 non highly compensated employees that have worked their year of service and have reached age 21.

The advisor has asked me to make the non owner highly compensated employees receive either no benefits or as little as possible.

If I include everyone in the plan, it will not be top heavy. If I exclude all of the highly compensated employees the plan would be top heavy. If I give the HCEs a top heavy minimum then it defeats the plan from a cost perspective.

I figure I am looking at going one of two ways.

1) Owner is group 1, NHCE employees are group 2, non owner HCEs are group 3. Group 1 gets an accrual, group 2 gets an accrual that will cause the plan to pass discrimination tests, group 3 gets a top heavy minimum accrual if the plan is top heavy.

or

2) Owner is group 1, everyone else is group 2. The elgibility section of the document is worded so that it excludes all non owner HCEs from being eligible in the plan.

I am struggling with the concept of eligible and not benefitting compared to ineligible. Can I exclude them via eligibilty and therefore they would not qualify for a top heavy minimum accrual? I can't find anything wrong with it, but yet it seems like I have done something to exclude some non key employees from receiving a benefit. They just happen to all be highly compensated.

Am I still drunk, or is this ok?

[Mike Preston]

I don't know whether you are drunk or not.

But excluding non-owner HCE's is a common approach to solving the problem you are having.

[himt4]

just some thoughts:

Last I remember, DB needs to cover 40% to pass participation test. so, if there are 22 non-excludable employees, you would need to cover 9 of them. So you could exclude all the non-owner HCEs from being in the Plan, and additionally you could exclude 4 of your NHCEs. The remaining benefitting employees will pass the coverage test at (8/12)/(1/10) > 70% with ease.

[AndyH]

If I exclude all of the highly compensated employees the plan would be top heavy.

Hmmmmm.????? You must have one wacky company.

[Belgarath]

There's no such thing as too much wine. Try this at the next medical society meeting - posit that the liver is a muscle, and therefore must be exercised regularly to be healthy. (Might be scary if some of them agree)

Andy - I agree wacky, but I've actually seen this a couple of times where there are several HC that are not also keys. Always throws me for a loop because I have a horrible tendency to treat the two as identical, which they generally are in our plans, but not always...

[AndyH]

I understand HCEs that are not Keys. But Keys that are not HCEs representing 60% of benefits? I figured there might be a better chance that ttott actually drank champagne and some afternoon Perrier reactivated the symptoms.

[himt4]

If the owner is within 10 years of NRA and makes the maximum salary, and the 12 NHCEs on average are 30 years away from retirement and averaging $30,000 salaries, then its very likely the plan will be top heavy. but if you also add in 9 non-key HCEs to the mix, it's very likely the plan will not be top heavy.

[AndyH]

Is the owner not an HCE? I thought HCEs were excluded. Oh, now I get it. He is not excluded. He is a non excluded HCE. TGIF

[SteveH]

I sometimes tend to over think things and convince myself that something I previously knew to be true, might not be.

Thanks for the reinforcement. Also yes, the owner and only key employee is 63 with quite a few 30 somethings in the plan.

I am in the same boat as Belgrath, I normally treat HCE and key as the same, because in almost every plan I deal with they are the same. This is just a different type of company.

It just seemed like I was doing something slick. If they are eligible the HCE have to get a top heavy allocation. If I just kick em out of the plan they get nothing. If this was acceptable you would think the top heavy rules would just indicate that it is not necessary to allocate a top heavy minimum to higly comp employees. That's really what I am doing here. It's just odd. I can't put them in the plan and give them a 1% accrual, it either 2% or nothing. See how easy it is to convince yourself that that doesn't make sense and it must not be possible?

By the way, this group was the most engaging group I have ever presented to before. I am thinking wine is a good pre meeting liquid for all presentations. They actually interupted me to ask questions, and challenged me on some of the possibilities I brought up in plan design. It was quite enjoyable instead of the usual blank stares you get. Although I didn't expect it to run until 10pm. I told my wife I would probably be home around 7:30 or 8:00. Instead I stumble in with wine on my breath at 10:00, and my tie loosened around the neck. Oh well.

[SteveH]

Just when I thought I was nearly finished, we get a curveball.

They have an existing DB plan.

All other issues aside, if the HCEs are eligble for the DB plan, if we take it over and amend and restate their document can we now classify the HCEs as ineligible for the plan and get around the top heavy issue?

I have had this discussion on here before about once a participant always a participant, which may not be true in all circumstances. But now we would have a situation where a HCE with a vested accrued benefit is a participant in the plan, then becomes an excluded class, but not a statutory excluded class. It's not like we are moving people from non-union into a union and can make them ineligible.

So ineligible but a participant from previous year?

I'm going home. The in laws are coming over for dinner tonight. I'm sure I can find another bottle of wine.

[SteveH]

A new week, a fresh look, problem solved. Thanks everyone for taking the time to look.