DB/DC Combo Top Heavy

[Vlad401k]

We have a DC plan that has about 80 employees, 6 of which are HCEs, of which 5 are key. Two of the key employees are owners and they are trying to receive the maximum possible contribution. The idea is to create a DB/DC plan combo that will allow the two owners to receive large contributions on the DB side. Since only 40% of all eligible employees are required to benefit on the DB side, the DB plan will only be benefiting the two owners and 30 NHCEs. So, the DB plan will include only the 2 owners and the 30 NHCEs.

The plan is not top heavy for 2016, but will become top heavy in 2017.

For 2016, we're planning to do the following:

1) Give a 7.5% gateway to the 30 NHCEs in the DB plan.

2) Give the maximum possible contribution to the two owners in both the DC and DB plan.

For 2017, we're planning to do the same. However, I'm wondering how the top heavy status will affect the plan and I have these questions:

1) Will the non-keys have to receive a 3% contribution or a 5% contribution. I've read that when there is a DB/DC combo, a 5% contribution (or a 2% EBAR) has to be made for non-keys. Is that correct?

2) Since all non-keys (and not just those benefiting in the DB plan) will have to receive the top heavy minimum, what will be the effect on the gateway contribution? Will the non-keys who are not benefiting in the DB plan have to be bumped up to 7.5%, since they are now benefiting? So basically, will all the non-keys have to receive 7.5% in 2017 or just the 30 that are in the DB plan (and the rest receive the top heavy minimum)?

Thanks for your help in advance.

[Lou S.]

How do you give a 7.5% gateway in the DB plan?

How do you not give the 7.5% gateway to all employees in the DC plan if you are using it to satisfy coverage testing with the DB/DC combo?

Non-keys only in the DC plan would only need to receive the 3% TH minimum, but that brings back the issue of the 7.5% gateway.

Non-keys in both plans need to satisfy one the following based on drafting of the plan (though again this may or may not satisfy gateway)

-the full TH minimum in both plans

-5% DC contrib

-2% DB minimum accrual

-another method that satisfies the rules and does not have employer discretion.

[Mike Preston]

Because he is giving 7.5% to the NHCE's in the DB plan. Weird, huh?

[Vlad401k]

Lou,

Thanks for your response.

In regards to the 7.5% gateway, the DB and DC plans will be tested separately (each can pass coverage on their own).

And you are right 7.5%. I mistyped. It's supposed to be given in the DC plan.

So basically, the 3% minimum does not apply for DB/DC combo, correct?

[Lou S.]

I'm still a bit confused is the design something like this -

Plan 1 - Cash balance - Owners get credit bringing them at or near 415 limit, NHCE get credit such that they pass 401(a)(26)

Plan 2 - Profit sharing - Owners get 415c limit, NHCEs in CB plan get 7.5% PS contribution, other NHCEs not in CB plan get 3% TH minimum?

If that's the case then no I don't think that works. But I'm really just guessing at what you are trying to get done.

[Mike Preston]

Other NHCEs not in CB plan must get gateway if they are entitled to $0.01 in DC plan.

[Vlad401k]

Mike,

What if the plans are not required to be aggregated? Each plan can pass coverage on their own. Does that still apply?

[Mike Preston]

Vlad,

It doesn't matter if they can pass coverage on their own. What matters is if they can pass both coverage and non-discrimination on their own. And based on what you have described, they can't. Because if they could there would be no reason to even mention gateway.