0% accrual by definition

[Bri]

So, I've taken a job where some of the DB plans have separate accrual rates for separate groups of employees.

A lot of the times, the accrual rate for a specific group is 0%.

We're not counting people in these groups towards our 401(a)(26) count, since there's no meaningful benefit accruing for them.

Now - let's take an example where the plan is combined with a 401(k) plan, and they're top heavy.

The employee in question is Highly Compensated but not Key, and he's in one of those 0% accrual groups.

Who out here thinks he counts as a participant in the DB plan, for purposes of needing to get a 5% top heavy minimum in the DC plan (the plan where the top heavy is taken care of for all)? Versus who'd think he's not really a participant in the DB and can get by with just 3% in the DC....

I wish the document had excluded these employees in the eligibility section, where it would be much clearer that they're definitely not "in" the DB plan. But that's not what I've got.

Thanks...

--bri

(insert witty signature here....)

[Effen]

I guess I would ask on what basis do you think they do not qualify?

The Reg is fairly clear -

A. Generally, every non-key employee who is a participant in a top-heavy plan must receive minimum contributions or benefits under such plan. However, see Questions and Answers M-4 and M-10 for certain exceptions. Different minimums apply for defined benefit and defined contribution plans.

You can amend the plan to exclude them in the future, but based on what you said, I would say he is a participant.

[AndyH]

Agree

[Bri]

My vote was that they did indeed qualify, which is why I brought it up with the actuary.

The counterargument being if they aren't considered a participant for 401(a)(26), then why should they be a participant for purposes of top heavy accruals either. Not sure to the strength of that argument, since plenty of times folks don't qualify for an accrual year but don't lose their standing as participants.

Seems like the actuary threw it to TAG and got the same answer. (And the warning not to exclude them by name in the document for reasonable classification purposes..)

thanks.

[david rigby]

The employee in question is Highly Compensated but not Key...

OK, but I always urge someone to double-check this.

[Effen]

The counterargument being if they aren't considered a participant for 401(a)(26), then why should they be a participant for purposes of top heavy accruals either.

These are different criteria. 401(a)26 is satisfied if more than 40% "benefit", since they don't benefit, they cannot be counted. 416 only references "participants". Since they are a participant, they must receive the TH minimum.

[John Feldt ERPA CPC QPA]

I agree that the 5% top heavy DC minimum applies, not 3%.

If for some reason they aren't eligible for DC allocations, then you have a traditional DB annuity accrual of a 2% life annuity payable a NRD in the BD or in th cash balance plan (unless the plan language provides more than 2% as the TH minimim life annnuity).

I would not worry about excluding by name unless the coverage test is less than 70% and you use the average benefits test to pass 410(b) instead of the 70% ratio percent test. The reasonable business classification only applies to passing coverage using the average benefits test.

I also agree that it's better to exclude that group under the definitions for excluded employees - having a zero percent accrual group is not that helpful.