Top Heavy Aggregation/DB + 401k

[Guest C. Slimmon]

We are trying to design a Plan in which the Key Employee participates in a DB Plan but NOT in the Company's 401k Plan thereby avoiding the requirement to aggregate Plans for purposes of Topheavy. If the Key Employee does not receive a current year allocation of deferrals, employer contributions or forfeitures in the 401k Plan (even though she has an "entry date" into the 401k plan) will she avoid the classification of active participant and thereby enable avoidance of Top Heavy aggregation?

[Guest]

I think that question T-6 of the top-heavy regs has your answer. Ifthe DB plan can pass 401(a)26,410(B),and 401(a)(4) by itself,you're ok. But if you need the average benefit test to pass coverage,you might have a problem,because the average benefit percentage test requires aggregation of all plans of the employer,even 401(k)and (m)plans,which are usually subject to mandatory disaggregation for purposes of 410(B).In this case the two plans would form a required aggregation group for top-heavy purposes.

[Guest JAREL]

I think if both plans must be aggregated due to coverage testing or otherwise, this means both plans will be Top Heavy. However, for participants who are only in the 401(k) plan the minimum contribution will be zero if no key employee contributes to the 401(k) or otherwise receives a contribution under the plan. So, it might not matter if the key employee already had an entry date.

[Guest JAREL]

After looking it up, I would say if you can pass coverage on it's own, the DC plan can include key's who don't contribute. See Question M-7 of Reg. 1.416-1

[richard]

Jarel - your first comment leads to an interesting plan design.

In your comment, you say that if you have a 401k and DB plan that have to be aggregated for testing, both plans are Top Heavy. However, if the key employee has met the 401k eligility but doesn't defer, the minimum contribution to the 401k plan for non-keys is zero. Note that the key employee is receiving an accrual in the other plan (the DB Plan), but it is apparently being ignored for the Top Heavy minimum in the 401k plan. This point is critical.

Let's say instead that we have 2 DC plans. The first plan covers the key employee at 0% of pay and all other employees at 2% of pay. The second plan covers the key employee at 15% of pay; no other employees are eligible.

The plans must be aggregated for testing; let's assume they pass using cross-testing. Both plans are Top Heavy. The Top Heavy minimum contribution in the first plan is zero because the contribution for the key employee in the first plan is zero; hence the 2% contribution for nonkeys in the first plan meets the Top Heavy rules. In the second plan, no nonkeys are eligible, so no benefits are required for nonkeys.

Somehow, this doesn't seem right, but what am I missing?