TH Minimum in DC Plan

[austin3515]

I work for a TPA that outsources our actuarial work to another company. Can someone please explain to me the best way to ensure that terminated people with more than 1,000 hours get the 5% THM and ONLY the THM in a DC Plan. We've been told that we need to get rid of the last day rule. So that's what we did. But now we have a plan where we're doing a 6% total allocation, and I'm stuck giving the extra 1% to a term. Shouldn't our document automatically give the 5% THM even though there is a last day rule, because in the document I specified that the THM wll be provided in the DC Plan?

We use the Corbel VS formatted Prototype.

[K2retire]

Where I used to work we typically set our allocation groups to include NHCEs >1000 hours still employed, NHCEs <1000 hours still employed, NHCEs >1000 hours not employed at year end, and NHCEs <1000 hours not employed at year end. That, or each participant in a separate group, would take care of your issue.

[Bird]

Shouldn't our document automatically give the 5% THM even though there is a last day rule, because in the document I specified that the THM wll be provided in the DC Plan?

I would expect so.

We'd generally have an end-of-year requirement, unless we had everyone in their own group, where you don't need it and don't want it so you have full control without fighting the document.

[austin3515]

I swear someone could have a two hour training or more just on THM in DB/DC Combos. Has anyone seen one from ASPPA or something like that? I'm reading what you're writing and I get it, but then I ask well "what about_____" and my head just starts to swim.

[austin3515]

So Bird... If we had 1,000 hours and last day rule in profit sharing and elect the 5% THM in DC Plan. Someone terminates in November after working 1,000 hours, you would expect that the basic plan document's top-heavy rules should override the last day rule in the same way that the top-heavy rules override the 1,000 hour rule in a DC only arrangement? That would seem hyper-logical, but for some reason that's never the answer I get from any actuaries. I actually did not get that answer from Corbel either.

[John Feldt ERPA CPC QPA]

With a DB/DC combo tested plan, for many reasons, not just top heavy, having each person in their own class in the DC plan can save your plan's design many times. That takes care of having to give a terminee more than the top heavy minimum when you don't want to provide extra, but it also allows you to give a terminee (or anyone) more when you need to for 401(a)(4) purposes.

Also look at what's used in the DB plan for accruing a benefit and consider how the design will fare under 401(a)(26) when terminations occur. In addition, if you want to use the persent value of the DB accruals as an offset for a portion of the gateway, consider the notion that you can't apply conditions for the gateway minimum, so watch out for the DC allocation if the NHCE did not accrue a benefit in the DB plan that plan year.

[Tom Poje]

shame on you. the I in IRS stands for "illogical" - you should know that by now.

I suspect because of the way the regs are written, you have to have to write your own special language that says something like "oh, by the way if you have someone who terminates with 1000 hours in a DB/DC combo, even though he is not eligible for a dc top heavy give it to him in the DC anyway" of course, anytime someone writes their own language all bets are off. (or put another way, in a volume submitter document I bet the hands are tied)

a few years ago at the ASPPA Conference on my top heavy talk I shared the following I tripped across in a takeover document for "special language"

1a. Plan to which Top-Heavy allocations are made:
i. [ ] This Plan
ii. [ ] Pursuant to the terms of another plan
iii. [ X ] Partially in this Plan
1b. If H.1a.iii is selected, describe how the Top Heavy minimum accruals will be made: 2% top heavy minimum to XXX, Inc. Cash Balance Plan and 3% top heavy minimum to this plan.

I'm not sure how that would pass because 2% Cash Balance + 3% profit sharing does not equal 5% top heavy

you would have to convert the 2% to a DC equivalent to verify that would work.

[chc93]

But then, if each plan (CB, DC) satisfies their own TH requirement, and the plan documents allow for each plan to satisfy their own TH requirement, shouldn't that be OK? Said another way, your 2% in the CB and 3% in the DC satisfies TH in each plan, even if they don't equal 5%.

[John Feldt ERPA CPC QPA]

2% cash balance is NOT 2% x 5-year avg comp payable as a life annuity at NRA.

[My 2 cents]

2% cash balance is NOT 2% x 5-year avg comp payable as a life annuity at NRA.

Just trying to make this a bit clearer: As the cash balance plan is a defined benefit plan, if it must provide top-heavy accruals of 2%, they must be life annuities payable at NRA equal to 2% of the 5-year final average earnings. Very different from a pay credit of 2% of this year's compensation.

[chc93]

Sorry guys... yes, I meant a 2% TH "benefit accrual" in the CB, not a 2% pay credit. Which is why I too simply said that the 2% in the CB which satisfies the CB TH requirement. My bad for not being clear.

[Tom Poje]

you are correct, if it was 2% accrual in cash balance that would be ok. but if you provided that, then there wouldn't be a need to provide anything in the DC plan as you would have already satisfied the top heavy minimum for a DB/DC combo, so at that point such language as I found makes no sense).

by the way, the statement that if each plan provides it's own minimum (2% db accrual and 3% DC allocation) even though it would seem logical, is not in the regs for combo plans

the regs require either

1. 2% accrual in the DB plan (which, as mentioned, if provided, you need nothing in the DC plan - though top heavy satisfied no guarantee gateway minimum is satisfied if needed))

2. 5% allocation in the DC plan

3. prove by comparability you satisfy the requirement

4. floor offset arrangement

[chc93]

Tom... thank you very much for the clarification.

[Tom Poje]

chc93 -

probably the main reason I even know some of tihs stuff 'off the top of my head' so to speak was because I did prepare an ASPPA talk. - otherwise I probably would have leaned towards the same logic that if each plan worked separately you are ok.

a few years ago for that talk I had the following example (this was from an actual situation)

retirement age = 62

3% contribution credit

int rate was 4.42% and so the 3% contribution credit translated into .499% accrual, which, by the way, would fail the minimum benefiting .5% for minimum participation (if you following that rule)

the 3% profit sharing translated into a 1.42% accrual which means the person received

.499 + 1.42 = 1.919% accrual so by comparability the top heavy was not provided.

of course the variable interest rate (the db used x months for the lookback) so in another year this might not have been a problem. or the fact the ee was now another year older makes a difference from a prior year.

[AdKu]

Does the regs. or the code requires a db/dc combo plan to provided TH Minimum for terminated participants (whether worked over 1,000 hours or not) at all?

[My 2 cents]

For what it's worth, it is my understanding that you cannot exclude someone from a top-heavy accrual or contribution just because they are not employed as of the last day of the plan year (or any other date for that matter), just as you cannot exclude someone who is not otherwise participating because they refuse to make mandatory employee contributions. This should be stated in the plan's provisions concerning what happens if the plan is top-heavy.

I think that the top-heavy accrual or contribution can be made contingent on the completion of 1,000 hours of service in the plan year if that is how the plan determines service. Except for non-participation due to failure to make mandatory contributions or the now-obsolete failure to attain a given level of earnings, top-heavy accruals or contributions are only provided to plan participants.

[Belgarath]

Actually, you've got that reversed. You can require a last day, but not a minimum hours requirement if you are employed on the last day.

P.S. - for citation, see 1.416-1, M-10.

[John Feldt ERPA CPC QPA]

And for the DB plan, you can require 1,000 hours, but not a last day.

So if the participant is:

• participating both plans (DB and DC)
• works 1,000 hours in the plan year
• terminates before the last day of the plan year
• the document states the TH minimum is provided in the DC plan
• the DB plan states participants in both plans will receive the TH in the DC plan
• the DC plan states participants in both plans get 5% of pay top heavy, but requires they be there on the last day

Is the last day requirement for the 5% top heavy overridden due to the combo arrangement, or

Is the TH minimum not needed due to the last day requirement (TH is satisfied without 5% of pay), or

Is the top heavy provided in the DB plan for that final year of participation?

Again, one must look carefully at how the documents are worded.

[Belgarath]

John's answer is far better and more complete than mine...

[AndyH]

Now let's hope the DB's normal form of benefit is a life annuity or we'll have to amend much of this discussion!