Does top-heavy 415(e) buy-back using DC plan require 4%(Code) or 7.5%

[John A]

The IRS Code provides that a plan can "buy back" the 1.0 for 415(e) by providing a 4% DC contribution. See 416(h)(2)(A)(ii)(II) below.

IRS Regs say that a plan can "buy back" the 1.0 for 415(e) by providing a 7.5 DC contribution. See IRS Reg 1.416-1 M-14.

Can the Code be used or does the IRS Reg have to be used?

Does anyone have experience using the 4% in the Code to do the buy-back? Does anyone have experience using 7.5% to do the buy-back? Can anyone tell me if there are specific situations that call for one or the other?

I realize 415(e) is going away soon, but I'd still appreciate any information on this. I have been curious for a long time.

Section 416(h)(2)(A)(ii)(II) is as follows:

(h) Adjustments in Section 415 Limits for Top-Heavy Plans.*

(1) In general.

In the case of any top-heavy plan, paragraphs (2)(B) and (3)(B) of section 415(e) shall be applied by substituting ``1.0'' for ``1.25''.

(2) Exception where benefits for key employees do not exceed 90 percent of total benefits and additional contributions are made for non-key employees.

Paragraph (1) shall not apply with respect to any top-heavy plan if the requirements of subparagraphs (A) and (B) of this paragraph are met with respect to such plan.

(A) Minimum benefit requirements.

(i) In general.

The requirements of this subparagraph are met with respect to any top-heavy plan if such plan (and any plan required to be included in an aggregation group with such plan) meets the requirements of subsection © as modified by clause (ii).

(ii) Modifications.

For purposes of clause (i) --

...

(II) paragraph (2)(A) shall be applied by substituting ``4 percent'' for ``3 percent''.

IRS Reg 1.416-1 M-14 Q. says:

M-14 Q. What minimum contribution or benefit must be received by a non-key employee when he is covered under both a defined benefit plan and defined contribution plan (both of which are top-heavy) of an employer and the employer desires to use a factor of 1.25 in computing the denominators of the defined benefit and defined contribution fractions under section 415(e)?

A. In this particular situation, the employer may use one of the four rules set forth in Question and Answer M-12, subject to the following modifications. The defined benefit minimum must be increased by one percentage point (up to a maximum of ten percentage points) for each year of service described in Question and Answer M-2 of the participant's average compensation for the years described in Question and Answer M-2. The defined contribution minimum is increased to 7-1/2 percent of compensation.

[mwyatt]

Generally, if both the DB and DC plans are ongoing plans, then the safe harbor buyback of the 1.25 multiple is 7.5%. The one situation where I can see the 4.0% being used would be where you had a terminated (not frozen) DB plan and you need to buy back 1.25 multiple to get a DC contribution for your key guy. Of course, next year when 415(e) goes away, you would want to look at this situation as there is no "buyback" needed.