Top Heavy Question

[Guest naveen]

NHCE-1 accrues a benefit of 5% in a cash balance plan resulting in a cash balance of 8% of compensation. An older NHCE-2 accrues less than 1%. Therefore, we have to provide him with a TH minimum of 2%. As a result, his cash balance in the year is 12% of compensation. Does the plan have to provide NHCE-1 with a cash balance equal to 12% of compensation?

[SoCalActuary]

NHCE-1 accrues a benefit of 5% in a cash balance plan resulting in a cash balance of 8% of compensation. An older NHCE-2 accrues less than 1%. Therefore, we have to provide him with a TH minimum of 2%. As a result, his cash balance in the year is 12% of compensation. Does the plan have to provide NHCE-1 with a cash balance equal to 12% of compensation?

Just by earning a top-heavy benefit, you do not have to make the cash balance account match the PV of the TH benefit.

The two benefit formulas exist independently until you reach payout.

Also, the two NHCE's should not be similarly situated if you have a cash balance plan with different rates.

[Guest naveen]

Thanks,

Maybe I will rephrase a bit to make myself clearer.

At 8% of compensation NHCE-2 accrues a benefit less than 2%. Therefore, he has to be provided a cash balance equal to 12% of his compensation.

Since they are similarly situated, should NHCE-1 also be provided with 12% of comp.

[SoCalActuary]

Thanks,

Maybe I will rephrase a bit to make myself clearer.

At 8% of compensation NHCE-2 accrues a benefit less than 2%. Therefore, he has to be provided a cash balance equal to 12% of his compensation.

Since they are similarly situated, should NHCE-1 also be provided with 12% of comp.

No he does not have to get a CB addition beyond the regular formula.

If/when he terminates, he gets the greater of the benefit which is equivalent to the CB account, or a benefit of the DB top-heavy minimum.

[John Feldt ERPA CPC QPA]

Take a look in the plan document regarding the cash balance formula and the top heavy minimum. It is unlikely that you will find language that indicates that a non-key employee will receive a cash balance credit equal to the greater of 1) the present value of the top heavy minimum or 2) the hypothetical cash balance credit of 8% of pay. If you do find that, please reply back to this board.

[Guest naveen]

SoCal - Thanks for responding and clarifying.

J4 - we are in the process of preparing the plan document and wanted this confusion out of the way.

[John Feldt ERPA CPC QPA]

If you also do administration with a back-office actuary, make sure the actuary understands how that works too. We had one send us back a valuation that provided additional cash balance credits so that the cash balance accrual would cover the value of the top heavy minimum. We had to explain that was not how the document was written.