top-heavy minimum after participant becomes excluded

[John Feldt ERPA CPC QPA]

DB/DC combination. Eligible Employee (HCE, but not key) enters both plans 1-1-2016. They accrue benefits for 2016.

Now, both plans are amended to exclude this HCE (but not key) by classification effective 1-1-2017. Not eligible for deferrals, match, PS or anything, and not eligible for DB.

The plans are not frozen. Owners and NHCEs and other HCEs are still eligible and accruing in both plans.

A colleague is arguing that continuing additional top-heavy minimums must be accrued even after 2016 by this HCE even though they are fully excluded, assuming they meet the top heavy accrual requirement (1000 hours for DB or last day for DC). Based on grey book 2001-35.

The written plan language appears to require the participant be an eligible employee to earn a TH minimum accrual. Essentially meaning they must earn a top-heavy year of participation to accrue additional top heavy minimum accruals. If they are now excluded by class, they can't earn any more years of top-heavy participation.

My colleague states that this HCE became a "participant" on 1-1-2016 and that fact requires the plan to provide top-heavy minimums to comply with the law/guidance, since they are still a "participant" with accounts and/or benefit accruals from the 2016 plan year. The document might not have a formula for them for any more normal accruals, but the plan would not meet the law’s requirements if the top-heavy minimum was not provided, causing a qualification issue.

Your thoughts on this?

[Lou S.]

Eligibility is not a protected benefit. If he's excluded and not eligible he doesn't get a TH minimum.

[John Feldt ERPA CPC QPA]

I also think Announcement 95-33 might help, but it is pre-EGTRRA, the IRS said “Remember that a plan may compute the minimum benefit based on a non-key employee’s years of participation in the plan, rather than years of service with the employer”.

[AndyH]

I don't think there is a clear answer in print on this. I side with once a participant always a participant for this purpose but others disagree. Suggest reviewing the EOB.

[John Feldt ERPA CPC QPA]

The EOB has this:

Suppose an eligible employee later becomes ineligible due to a job classification? Where the plan excludes employees in a specified job classification it is possible for an employee to become eligible for the plan, and thus eligible for top heavy minimums, but later become ineligible due to the job classification (e.g., a salaried employee later becomes an hourly-paid employee under a plan that excludes hourly-paid employees). Should the plan continue to provide this employee the top heavy minimum, assuming he/she is a non-key employee, even though he/she is no longer eligible to participate in the plan? As noted in 3. above, Treas. Reg. §1.416-1, M-10, states that only non-key employees who are participants and who are employed at the end of the year accrue the top heavy minimum in a defined contribution plan. That Q&A goes on to say: ”A non-key employee may not fail to receive a defined contribution minimum because either (1) the employee is excluded from participation (or accrues no benefit) merely because the employee's compensation is less than a stated amount, or (2) the employee is excluded from participation (or accrues no benefit) merely because of a failure to make mandatory employee contributions or, in the case of a cash or deferred arrangement, elective contributions.” It comes down to how you define a participant once the person has qualified for the plan. It is clear that if you have always been in an excluded classification, then you are not entitled to participate (assuming of course the plan is able to pass coverage without covering such employees). Our interpretation is that, if an employee later becomes part of an ineligible classification (other than the two circumstances in the quoted part of the regulation above) he/she is not entitled to the top heavy minimum for the plan year, so long as he/she is excluded from the plan for the entire plan year. See also Rev. Rul. 96-48, Holding (Issue 2). Note that if, in the plan year that the employee becomes part of the ineligible class, the employee is eligible for at least a part of that plan year, the top heavy minimum will apply to such employee based on his/her compensation for the entire plan year. At the IRS Q&A Session at the 2014 ASPPA Annual Conference held in National Harbor, MD, the IRS agreed with this interpretation.

[AndyH]

I recall this being the DC context. I believe the EOB used to have a further statement to the effect that the answer within the context of a DB plan is less clear. Maybe that has been removed? (This is from memory from researching this several years ago).