accruals and plan freeze

[Gary]

A husband and wife (owners) have a one participant DB plan for several years.

They hire an employee who is scheduled to commence plan participation on 7/1/11.

They freeze the plan on 6/30/11 after they received an accrual for 2011.

Should employee receive an accrual for 2011?

The issue being: should employee receive an accrual to pass non discrimination for 2011, thus resutling in a corrective plan amendment?

thanks

[AndyH]

Yes would be my vote.

Unless that is you wanted to argue satisfaction of the requirements through a PS plan that is permissively aggregated. But I would not try that since there is nondiscriminatory timing of amendment exposure.

IMHO.

[Gary]

i agree.

actually due to profit sharing limits, the non discrimination cannot be satisfied through a PS allocation alone.

thanks

[frizzyguy]

actually due to profit sharing limits, the non discrimination cannot be satisfied through a PS allocation alone.

thanks

I definitely do not agree with this statement. It depends on many, many factors and I would say is very likely not the case. Maybe I'm missing something though. It's happened before and will definitely happen again.

[Gary]

profit sharing limit is 6% since non pbgc plan and that doesn't provide enough allocation

[rcline46]

Assuming the freeze was done correctly (hard freeze) the employee never becomes a participant in the DB plan. I am making assumptions also as to the entry date as defined in the document and so forth.

How do you give an accrual to someone who never entered the plan? Top Heavy only applies to plan participants. Top Heavy for a person in only the DC plan when there is a DB plan is 5% when not a participant in the DB plan. Gary implied there was also a DC plan.

I am not aware (but willing to learn) where it says the employee must get an accrual in the DB plan when they are not a participant in the DB plan.

[AndyH]

He stated that it would be done through a corrective plan amendment.

If no equivalent benefit is provided somehow, the plan would fail 410(b) and 401(a)(4) testing, from the information presented..

[frizzyguy]

profit sharing limit is 6% since non pbgc plan and that doesn't provide enough allocation

A couple items. First, if the minimum for the DB plan is zero or can be satisfied by balances then you can still make the profit sharing limit 25%if you don't contribute to a DB plan. This sometimes comes into play when a plan has been around for awhile and the owners always put in the max. If that's not the case, the 6% of total pay limit is for the plan, not individual. Generally the owners make significantly more so you can give quite a bit to the staff member to pass testing before that is passed.

For example, both owners make 250,000 and staffer makes 50,000. Total pay equals 550,000. 6% of this is 33,000 which is 66% of the staffers comp. Assuming that you, for whatever reason, gave safe harbor to everyone and not just NHCEs, then each owner needs to get 7,500. That means that 33,000 from before is now 18,000 available to the staffer. This is 36% and still pretty good for passing testing if you're doing it right.

[frizzyguy]

I realized I worded my first point very poorly. I was trying to discuss the 31% of pay limit.

If the DB plan contribution is 6% or less of pay then the you can go up to 25% in the profit sharing plan.

[ScottR]

I agree that the employee doesn't need to get an accrual. Only if they wish to keep the plan tax-qualified.

The employee was a non-excludable employee for coverage testing for the year in question. If he doesn't get an accrual somewhere, and the owners do, how is that going to pass testing?

... Scott

Assuming the freeze was done correctly (hard freeze) the employee never becomes a participant in the DB plan. I am making assumptions also as to the entry date as defined in the document and so forth.

How do you give an accrual to someone who never entered the plan? Top Heavy only applies to plan participants. Top Heavy for a person in only the DC plan when there is a DB plan is 5% when not a participant in the DB plan. Gary implied there was also a DC plan.

I am not aware (but willing to learn) where it says the employee must get an accrual in the DB plan when they are not a participant in the DB plan.