Top Heavy Cash Balance Plan

[carrots]

In a Top Heavy Cash Balance Plan, does the minimum benefit for a non-key employee have to be:

1. a contribution credit equal to the amount needed, with projection, to fund an annuity of 2% AMC at NRD, or

2. a contribution credit of 3% (or 5%) of compensation?

[Effen]

I don't think there is anything in 416 that gives cash balance plans a different minimum. Therefore, if you have a top heavy cash balance plan it needs to provide at least a 2%/YOP (max 20%) monthly annuity at NRD. You may want to use something like your option 1 to determine their credit in a given year that might get you close, but when they actually terminate and are paid you will need to check against the real minimum and make sure they at least get that amount. This may be more than their cash balance account depending on the interest rate.

This is why many db/dc combo provide the TH min in the DC plan.

[Guest Deflector]

I agree with what Effen is saying. To add to that, I am not sure you have to actually give a 2% equivalent contribution credit. I think you have to make sure that the benefit is more than the minimum. There could be a difference if not all the plan years are top heavy.

For example, if you had a plan for 3 years that was only top heavy in year 3, you would not have to give a contribution credit of a 2% equivalent in year 3, but only make sure the total benefit - the hypothetically account - was more than the 2% equivalent.

If I did expect the plan to be top heavy for all years, I would normally give the 5% in the DC, your option 2.

I have included something from the IRS website, "the third option" mentions offsetting the DC from the 2% equivalent, and combining them. I have never used it (or know the validity of it), but didn't know if it could help you.

"4.72.5.4.1 (03-01-2006)

Safe Harbor Top-Heavy Minimums

A non-key employee who participates in both a top-heavy defined contribution plan and a top-heavy defined benefit plan maintained by the same employer need not receive both a defined contribution and defined benefit minimum, but should receive more than just a 3% contribution to the defined contribution plan. See IRC 416(f) and Regs. 1.416-1, M-12.

A plan may use one of four alternative safe harbor methods to provide top-heavy minimums. The plan must specify the method selected. See Regs. 1.416–1, M–12 and M–15.

Only the defined benefit plan must provide the minimum benefit.

A floor offset arrangement under which the defined benefit plan minimums can be offset by the defined contribution plan benefits.

Both the defined contribution plan and the defined benefit plan together, using comparability analysis, provide benefits at least equal to the defined benefit plan minimum.

A safe harbor defined contribution minimum of contributions and forfeitures equal to 5% of the compensation of each non-key employee. "