3 Plan arrangement and top heavy

[Guest CadH]

Facts:

401(k) Plan 1 has been in existence for many years. Key employees participated in Plan 1 however they were excluded from participation 12/31/2005 and their account balances were transferred to Plan 2 during 2006.

401(k) Plan 2 is effective 1/1/2005. The first contributions made to Plan 2 were made 9/15/2006.

CB Plan is effective 1/1/2005. The first contributions made to the CB plan were made 9/15/2006.

For 2005 and 2006 there were key employees with an account balance in Plan 1.

Plan 1 for 2006 contains HCE employees only and passes 410(b) without Plans 2 or the CB Plan. Plan 2 and the CB plan are tested together for 410(b) and 401(a)(4) purposes.

For the 2005 plan year the top heavy test is determined as of 12/31/2004. The first year rule is intended to be used only when there are no other plans in existence or required to be taken into account for purposes of top heavy.

The account balances as of 12/31/2005 for key employees are as follows:

Plan 1 market value $240K/$420K = 57%

Plan 2 market value $0/$0 = 0%; accrual $0/75K = 0$

CB Plan market value $0/$0 = 0%; accrual $403K/$446K = 90%.

Question:

For determining if the Plan is top heavy during 2006 for the Plan 2 and CB plan which are aggregated for testing purposes would you aggregate the market value of Plans 2 & the CB plan together or would you aggregate the accrual values of Plan 2 & CB plan together? Ie. $0/$0 = 0% not top heavy or $403/$521 = 77% top heavy

For determining if the Plan is top heavy during 2006 for Plan 1 which is not aggregated with any other plan of the employer for testing purposes would you use the market value of Plan 1 only? $240K/$420K = 57% not top heavy.

Thanks

[Gary]

My first observation is that you need to compute the present value of accrued benefits in the cash balance plan in order to determine top heaviness for the plan or plans combined.