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Combo plans - testing+top heavy


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Never dealt with the following as always use 3% non-elective SH.

Existing DC plan with 401k+ADP safe harbor match+PS options (no ps contributions ever made) 10 eligible, only 4 deferring thus only 4 getting SH. Passes top heavy on its own.

Want to add a DB plan and need to combine for all testing and top heavy.

If a participant is in both plans and not getting any allocation under the DC plan because not referring, how is the top heavy allocation determined?

If a participant is excluded from the DB plan and also not getting a SH because not deferring, how is the top heavy allocation determined?

Thank you for your input.

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There are a number of acceptable ways to do it but it should be coordinated in both documents as to where and how the top-heavy minimum is satisfied.

You may find that switching from a SH match to a SH non-elective may be the way to go. Largely due to losing the get out of TH free card and fact that you may need to satisfy the gateway requirements that often (but not always) in small plans works out to a 7.5% of pay contribution to NHCEs in the DC plan. You'll also often find the TH minimum in combo plans is given in the DC plan.

If a non-key employee is covered by both plans you typically have the following options

1 - Give TH minimum in both plans

2 - Give 5% minimum in DC plan

3 - Give the 2% minimum accrual in the DB plan

4 - Another method acceptable under the code.

If a non-key employee is covered by only one plan, they receive the TH minimum in the plan they are included in.

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12 hours ago, Lou S. said:

There are a number of acceptable ways to do it but it should be coordinated in both documents as to where and how the top-heavy minimum is satisfied.

You may find that switching from a SH match to a SH non-elective may be the way to go. Largely due to losing the get out of TH free card and fact that you may need to satisfy the gateway requirements that often (but not always) in small plans works out to a 7.5% of pay contribution to NHCEs in the DC plan. You'll also often find the TH minimum in combo plans is given in the DC plan.

If a non-key employee is covered by both plans you typically have the following options

1 - Give TH minimum in both plans

2 - Give 5% minimum in DC plan

3 - Give the 2% minimum accrual in the DB plan

4 - Another method acceptable under the code.

If a non-key employee is covered by only one plan, they receive the TH minimum in the plan they are included in.

Agree with you completely

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Thank you for your replies.

I am assuming that item 3 is 3% and not 2%, correct?

If they want to stay with the SH match where the top heavy is automatically satisfied, because of the combo plans, excluding them from the DB plan will still require the participants to get at least 3% (plus whatever is necessary for the gateway), correct?

The way i see this, there is absolutely no advantage staying with the SH match, if any.

Thank you again for your comments.

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Lou S. is correct. You should read the 416 regs carefully to understand the requirements and options available to satisfy top heavy minimum in a combo plan. In particular 1.416-1 M-2, M-4, M-7 and M-12 will be helpful but I recommend reading the entire reg.

One advantage to the SH match vs the SH nonelective is that an employee who works fewer than 1000 hours and terminates would, with a SHNEC have to get the safe harbor and therefore the entire gateway, whereas with a SHMC they do not necessarily need to get any contribution. Whether this outweighs the need to give the match in addition to the full gateway to the eligible employees will depend on the employer demographics and turnover rate.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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  • 4 years later...
On 8/8/2019 at 6:37 PM, Lou S. said:

There are a number of acceptable ways to do it but it should be coordinated in both documents as to where and how the top-heavy minimum is satisfied.

You may find that switching from a SH match to a SH non-elective may be the way to go. Largely due to losing the get out of TH free card and fact that you may need to satisfy the gateway requirements that often (but not always) in small plans works out to a 7.5% of pay contribution to NHCEs in the DC plan. You'll also often find the TH minimum in combo plans is given in the DC plan.

If a non-key employee is covered by both plans you typically have the following options

1 - Give TH minimum in both plans

2 - Give 5% minimum in DC plan

3 - Give the 2% minimum accrual in the DB plan

4 - Another method acceptable under the code.

If a non-key employee is covered by only one plan, they receive the TH minimum in the plan they are included in.

hi there,

if there are 10 non-Keys benefiting in both plans; 3 of them are getting 2% in DBCB side, and 7 of them are having less than 2% in DBCB. do we need to allocate 5% in DC plans for all non-keys together? or we only need to allocate 5% in DC for the 7 non-Keys?

i.e. does the TH allocation method have to be consistent for all non-Keys or it can be determined individually? Thank you so much!

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Well the first thing regarding that - 

The plan documents probably indicate how the THMs are allocated in either, both, or (perhaps likely) just the DC plan.  If the DC plan document says all the non-keys get 5%, then they get that regardless if TH could have already been covered.

The rate of accrual in the CB plan doesn't matter as much, like how DC plans can sneak by with a lower THM rate if no Key gets to 3%.

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1 hour ago, Aca said:

hi there,

if there are 10 non-Keys benefiting in both plans; 3 of them are getting 2% in DBCB side, and 7 of them are having less than 2% in DBCB. do we need to allocate 5% in DC plans for all non-keys together? or we only need to allocate 5% in DC for the 7 non-Keys?

i.e. does the TH allocation method have to be consistent for all non-Keys or it can be determined individually? Thank you so much!

It needs to be spelled out in the Plan Documents. And I believe in a manner that does not allow for discretion.

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