Top Heavy minimum for Participant moved to excluded class...

[jkharvey]

The plan is amended to excluded several HCEs. These are not key employees, however. Do they need TH minimum on comp for the entire 1/1-12/31 period if they became ineligible at 9/1?

[12AX7]

415©(3) definition gets used - entire plan year for any TH minimum.

[ETA Consulting LLC]

I think the question is whether they are entitled to a TH minimum since they are not "eligible employees" under the plan as of 12/31 (due to the amendment placing them in an excludable class on 9/1). I think you must actually be an 'eligible employee' on 12/31 as well. Since the plan was amended to exclude a certain class, then that class would not longer be partcipating in the plan.

This type of amendment may open a host of other issues if there were no accrual requirements in place (i.e. last day/1000 hours). Remember, you cannot amend to change the allocation of a contribution after the conditions for receiving that contribution have been met. Hence, the amendment on 9/1 excluding those employees "may" be an issue if the (otherwise) accrual requirements for a contribution have been met. At the same time, however, the accrual requirement for the TH minimum is the last day; so there wouldn't be a point of contention on that issue.

Just a few things to think about

Good Luck!

[Kevin C]

What does the plan say about who gets the TH minimum? I would expect it to say that any participant who is not a Key Employee and who is employed by the employer on the last day of the plan year receives the TH minimum. That's what our VS document says. I don't see any requirement in our documents that you be an eligible employee on the last day of the year.

That seems to go with the regulations:

1.416-1, M-10 Q. Which employees must receive the defined contribution minimum?

A. Those non-key employees who are participants in a top-heavy defined contribution plan who have not separated from service by the end of the plan year must receive the defined contribution minimum. Non-key employees who have become participants but who subsequently fail to complete 1,000 hours of service (or the equivalent) for an accrual computation period must receive the defined contribution minimum. A non-key employee may not fail to receive a defined contribution minimum because either (1) the employee is excluded from participation (or accrues no benefit) merely because the employee's compensation is less than a stated amount, or (2) the employee is excluded from participation (or accrues no benefit) merely because of a failure to make mandatory employee contributions or, in the case of a cash or deferred arrangement, elective contributions.

[ETA Consulting LLC]

How does your document define "Participant"?

[Kevin C]

It defines Participant the way you would expect. It also makes it clear in the Plan Compensation section that someone who moves from an eligible class to an ineligible class during the year is a participant for the portion of the year they are in the eligible class. With the top heavy minimum determined for the plan year, I don't see how you could avoid giving the TH minimum to a non-key who participated for part of the year and is employed on the last day of the plan year.

If you have the online EOB, try Chapter 3B, Section IV, Part A.3.b on page 3B.60. It says that an employee excluded for the entire plan year is not a participant and is not entitled to receive a TH minimum. That assumes 410(b) doesn't force you to bring that person into the plan as part of a correction.

[ETA Consulting LLC]

My document defines a "Participant" as an "eligible employee". I asked that question in order to avoid the semantical debate. As for whether or not someone who is no longer eligible for the plan due to being part of an excluded class is entitled to a TH minimum, my position is that they are not (since they are not a participant in the plan on the last day).

Now, you are saying differently (that because they were a participant at some point during the year 'and' they are employed on the last day, they are entitled to a TH minimum). I'm having trouble determining that entitlement since they are not participants in the plan on the last day.

When I say Eligible Employee, I mean participant (but not active participant). May plans provide different definitions to these terms. At any rate, I think our positions are clear. I just don't see how someone who is not a participant at year end can receive the TH minimum.

Good Luck!

[ETA Consulting LLC]

Let me add a few points:

1) The regulation makes it clear that a non-key employee may not be excluded for failure to meet the accrual requirements for a contribution (i.e. 1000 hours). This implies that the individual is still a participant in the plan and would otherwise receive any allocation given if the accrual requirements are met.

2) It also states that it cannot be made based on a required action for the non-key (i.e. requiring them to defer or make mandatory contributions).

3) Where we are hung up is that the Regulation doesn't address what happens when the non-key is no longer a participant in the plan (who would not be allowed to make deferrals or receive any allocation of employer contributions regardless of any accrual requirements).

4) You've corrected me at least 10 times in the past. Each time, you clearly proved me wrong. So I'm open to new information; it only makes me more informed With that said, I just do not see the actual link in how someone who is not a particpant (eligible employee) in the plan at year end would be entitled to the TH minimum.

Good Luck!

[BG5150]

Who wrote your document?

Ask them.

[Kevin C]

If your document says they must be an Eligible Employee on the last day of the plan year to receive the TH minimum and you have a determination or opinion letter, I would say that supports your position. But that is not what the regulations and our VS document say. They both say Participant and employed on the last day of the year, not Participant on the last day of the year. In the situation we are discussing, there is a big difference between the two.

I'll also point out that you appear to be saying you can avoid having to contribute the TH minimum by moving all non-key employees to an ineligible classification by 12/30. I don't see it working that way.

[ETA Consulting LLC]

We'll, 410(b) would be the applicable test to ensure that isn't done. But, you are correct that such an action would, otherwise, appear agressive.

I'm "AM" saying, however, that when you amend the plan to exclude a certain class, then they are no longer "participants" in the plan; and, therefore, not entitled to be treated as such. I 'wish' the regulations stated that "anyone who is a participant at any time during the year" and is employed on the last day; or even there was some definitive defintion of Participant that would mean "any time during the year". If that were the case, we'd be on the same page. I just don't see it with the way the current rules (and documents) are written. "Participant" doesn't appear to be defined as "any time during" but instead "as of a single point in time".

Good Luck!

[Kevin C]

FWIW, I submitted this question for the "Ask the Experts" session at the ASPPA Annual Conference last week. I was surprised when it was the first question addressed. Sal said they are eligible for the TH minimum using full year 415(c ) compensation. I didn't completely follow his brief explanation, but he was clear that he thought a non-key participant who was eligible to defer for part of the plan year and who is employed on the last day of the year should receive the TH minimum. He asked the panel if they agreed and they did. Another panelist pointed out that the regulations do not say you must be a participant on the last day of the year.