Top-Heavy minimum

[Guest lerieleech]

We have a DB/DC combo where the documents were designed to provide the top-heavy minimum, in cases where someone participates in both, in the form of a 5% DC allocation.

Two people who are vested participants in both plans terminated during the plan year. Both worked 1000 hours. The DB document says that the TH min need not be provided in both, and may provide it in the form of a 5% allocation in the DC plan. The DC document also says that the TH min need not be provided in both, and may provide it by increasing the 3% minimum DC allocation to 5%. However, the DC document contains a last-day requirement, which is referred to where it mentions the basic 3% minimum.

Because of other provisions in the DC plan, all participants, whether active or not, are receiving a 7.5% DC allocation. So in the case of the two terminated participants referred to, they will certainly receive a DC allocation that is good enough to satisfy the TH requirement. But my concern is, since the DC document says that those who are not employed on the last day of the plan year do not get a TH allocation, are we allowed to consider the allocation they did receive as applying to the TH min? Or do we have to give them a 2% minimum DB accrual?

[John Feldt ERPA CPC QPA]

If they receive 5% of 415 compensation in the DC, then they have met the top heavy requirement based on the scenario you describe. Be careful about compensation, 416 requires 415 compensation which can be different from the definition used for allocations. So, as long as 5% of 415 compensation is allocated, then you have met the TH minimum.

[Mike Preston]

Unfortunately, the IRS believes that top-heavy minimums are not a statutory overlay. Instead, they believe that the top-heavy minimums must be clearly delineated in the terms of the plan(s).

Hence, if the real (statutory) top-heavy minimum is satisfied (as would be obvious with a 7.5% of pay contribution), the terms of the plans can still operate to cause additional allocations/accruals.

It is therefore impossible to answer the original question without an in-depth analysis of the language in both plans.

[Guest lerieleech]

Thanks.

I did check with the attorney who drafted the documents, and he said that the TH minimum must be satisfied in the DC plan, according to the documents.

Years ago, I encountered a DB/DC combo where the TH min was in the DC plan acording to the documents. The DB plan was amended to frontload the accrual to the maximum extent permitted by law. It was enough to accrue several years of potential TH mins at a time, but because the DC was not amended, it still had to provide the 5% minimum.

It didn't seem very logical, but that was the way it was. It was seeing things like that that lead me to ask questions like the above one.