Providing Top Heavy in the Cash Balance Plan

[MLML]

Hello,

If the paycredit rate (say 5%) is enough to pass the 401(a)(4) test, but not enough to meet the Top Heavy benefits, what do you do?

Say an employee earned $1,000 in paycredits for 2018.  Plan passes 410b and 401a4.  Say the hypothetical account balance for the employee is $2,000 as of 2018, but if the employee terminates now and therefore receives the Top Heavy minimum, the amount must be increased to $5,000.  So you know the paycredit for 2018 is not enough for the "distribution" amount....

Do you increase 2018 pay credit for this person with a discretionary amendment?  I don't think 11g amendment applies since there is no failed test?

If you leave the paycredit at $1,000 for 2018, do you inform the client that the actual payout amount would have to be $5,000? 

Creating a DC plan would be the best option, but let's say the client is not interested in adopting one.

 

Thank you!

 

 

[C. B. Zeller]

What does your document say? This is what mine says under top heavy minimum benefit:

Quote

Form other than Straight Life Annuity. If the form of benefit is other than a straight life annuity, the Participant must receive an amount that is the actuarial equivalent of the minimum straight life annuity benefit. If the benefit commences at a date other than at Normal Retirement Age, the Participant must receive at least an amount that is the actuarial equivalent of the minimum straight life annuity benefit commencing at Normal Retirement Age. 

So you would have to pay out the AE of the TH minimum, regardless of their hypothetical balance. No amendment needed.

[MLML]

C. B. Zeller,

My document says the same, but I guess my question was more related to the daily administration side.  Clients usually focus on the actual paycredits and think that's what they are providing each year to the participants.  I wanted to see what experts are advising to clients to prevent "surprises" at the actual payout time.

Thank you.

[CuseFan]

Agreed, the TH minimum is a "benefit" not an account balance, and plan must pay the LSPV of that benefit regardless of the account balance. Maybe you can translate into an additional balance/TH credit and side track it along the way for the client's edification and prevent surprises.

[chc93]

5 hours ago, MLML said:

If the paycredit rate (say 5%) is enough to pass the 401(a)(4) test, but not enough to meet the Top Heavy benefits, what do you do?

 

If the pay credit does not meet the TH benefit requirement, wouldn't you be obligated to increase the pay credit sufficiently to meet the TH benefit requirement for the plan year?

[Mike Preston]

No, but the valuation might recognize it. 

[AndyH]

I understand that the top heavy minimum would be subject to 417(e), so whipsaw was awakened to a certain extent.   Creating a CB allocation would not satisfy this issue.