Exclude HCE by name even though non-key

[Trekker]

An HCE (currently a participant) desires to be permanently excluded by name from the PSP. He was a key employee up until this current year; now is a non-key employee. The Plan is top-heavy.

Is this exclusion permitted, and may the amendment be effective for this current year or must it be prospective?

Thanks.

[My 2 cents]

If he is now a non-key employee but had been a key employee, his account balance is no longer relevant to the top-heavy testing. Account balances and benefit amounts for former key employees are always excluded for all purposes of top-heavy testing, whether they include newer amounts or not.

What would be the point of his being excluded from the plan? Why would he want to do that?

[Trekker]

Not concerned about testing, but giving him the 3% top heavy minimum as a non-key, which he does not want.

[Lou S.]

I think the conservative approach is to put him in a job classification that is excluded rather than by specificly name and to make it effective the first day of the next plan year (prospective if you will).

[Tom Poje]

well, the right to continue to participate in a plan isn't a protected benefit, so I don't see why they couldn't be excluded in the current year. I haven't seen it addressed in regards to top heavy, but if someone is no longer an 'eligible' participant I don't see how they would receive top heavy.

of course, if the person has worked, for example, 1000 hours, and the only requirement to accrue a benefit is 1000 hours (no last day rule), I don't see how you could exclude them from a current year non top heavy contribution.

If the person really doesn't want the 3% he can send it to me and I will take that nasty burden from him, somehow and someway I will manage to get by carrying that weight.

[david rigby]

Perhaps I'm just a cynic, but this has a bad smell to it.

1. Are you absolutely sure the HCE is no longer a Key?

2, Why would a current participant want to be excluded? Could the HCE be an owner who misunderstands the consequences of such exclusion?

(Hey, I've learned to be skeptical, that there are often important facts not yet disclosed.)

[Trekker]

Participant is former owner who is winding down his employment.

Actually, the plan was amended late last year, effective this current year, to exclude John Doe, provided he was an HCE and a Key. We did not know at the time that he would not be a Key this year. This year he owns less than 5% and makes less than $150K.

Any help?

[My 2 cents]

Perhaps I'm just a cynic, but this has a bad smell to it.

1. Are you absolutely sure the HCE is no longer a Key?

2, Why would a current participant want to be excluded? Could the HCE be an owner who misunderstands the consequences of such exclusion?

(Hey, I've learned to be skeptical, that there are often important facts not yet disclosed.)

Add an item 3 - having lost the control necessary to be considered a key employee, is it possible that he is being coerced into "waiving" the top-heavy minimum?

[Trekker]

No coercion whatsoever.

[Tom Poje]

you indicated this year he owns less than 5%. but what about last year?

[Trekker]

Last year he owned more than 5%. Sold most of it last year and the rest this year.

[Kevin C]

The question of top heavy minimum when a non-key is moved to a non-covered class of employees during the year was discussed last year.

http://benefitslink.com/boards/index.php?/topic/54458-top-heavy-minimum-for-participant-moved-to-excluded-class/#entry237265

[Tom Poje]

ah, grasshopper, the IRS says the answer is unclear. in this example the person was non key in 2010, but married the owner in 2011. despite the fact she is now an owner in 2011, she is due the top heavy for non-keys, because the determination had already been made the preceding year. By that logic, in your case,the person was a 5% owner in the prior year, so is 'determined to be a 'key' employee.

Margaret became a participant in a 401(k) plan in the 2010 plan year, which ends December 31, 2010. For 2010, Margaret did not satisfy any of the key employee tests. The plan is top heavy for 2011 because the top heavy ratio exceeds 60%. The top heavy ratio is computed as of 12/31/2010, which is the determination date for the 2011 plan year. For that calculation, Margaret's account balance as of 12/31/2010 is treated as a non-key employee account balance. During the 2011 plan year, Margaret marries the majority owner of the company. This makes her a more-than-5% owner of the company by attribution. Does Margaret receive a top heavy minimum contribution for the 2011 plan year? Should she have received a top heavy contribution for the 2010 plan year even though the employer didn't fund the contribution until 2011 after Margaret already had married the owner?

IRS response. There is no guidance directly on point, but the most reasonable interpretation is that Margaret receives a top-heavy minimum contribution for 2011. For top-heavy purposes, a single determination date is prescribed by IRC § 416(g)(4) for determining both whether the plan is top-heavy and whether an employee is a key or non-key employee. While it would be intuitive to adjust this determination based on events occurring within the year after the determination date, this interpolates a condition that is not in the statute. Note that the House Report (H.R. Rep. No. 107-51) and Conference Committee Report (H.R. Conf. Rep. No. 107-84) accompanying EGTRRA § 613 both provide that the determination date is used for identifying who is a key employee in the following year.
2011 ASPPA Conference #47

responses at such conferences don't necessarily reflect an actual position. some would argue otherwise.

[Trekker]

I like your reasoning, Tom. I will think that through with my specific facts and also look at the link from Kevin.

Thank you both!

[Kevin C]

If you are going to the ASPPA annual conference this year, you'll want to look at question 38 in the DC IRS Q&A session handout. It deals with top heavy minimums when a participant moves to an excluded class during the year. They changed the facts slightly, but it is basically the TH part of your question. I find it interesting that after the response to essentially the same question at the Ask the Experts session last year, ASPPA's proposed answer disagrees with the response from last year. But, note that the IRS response disagrees with the proposed answer, points to a similar question in the 2000 Q&As and says the participant gets the TH minimum for the year of the change.

[Trekker]

All's well that ends well. After further fact-finding efforts, it has been determined the participant is both HCE and Key in 2014 and will be HCE in 2015. He will be excluded prospectively for 2015. Then retiring for good.

This has been an educational experience for me.

Thanks!