401a26 and frozen plan + top heavy

[Jakyasar]

Hi

Totally fried brain so will ask the following stupid questions

Frozen CB plan (frozen early 2023 hard freeze i.e. no new entry+ no accruals to anyone):

• Top heavy
• Title I (no PBGC)
• Underfunded i.e. assets are less than the total account balance
• Covering 2 owners and a few previously terminated participants.
• 2 additional non-owner employees, one HCE and one non-HCE categorically excluded

PS Plan:

• Not top heavy
• Only PS provisions
• No contribution for 2023
• Top heavy benefits are provided under PS plan and only to non-keys (no top heavy provisions under the CB)

Combined plans are top heavy and plans were aggregated in the past for testing.

Questions:

1. I believe I have to pass 401a26 within the CB plan i.e. at least 2 must get meaningful benefit, agree?
2. If prior benefit structure would work, how would I test it (I am always confused with this). I have 2 active and 3 inactive participants, all with meaningful benefits prior to freeze. Any thoughts on this?
3. Assuming I need to provide the meaningful benefits and only to the 2 non-owner participants, I do not have to provide any top heavy under the PS plan as long as the keys do not get any allocation in either CB or PS plans, agree?

What else am I not thinking of/asking about?

Thank you.

[Jakyasar]

As an addendum for the prior benefit structure, there were no other terminated participants paid out so what you see is what you have.

Does it matter if the 3 terminees (terminated in prior years) are not fully vested?

Reread 1.401(a)(26)-3 and may be there is hope to pass under prior structure rule but again fried brain and would love to hear from the gurus out there.

[Luke Bailey]

Jakyasar, to satisfy prior benefit structure, the plan has to have meaningful accrued benefits (you say you have, but this is a "facts and circumstances" determination with many data points, none of which you have provided) to 40% of the employer's employees and former employees. See 1.401(a)-26-3(c). You've given us the numerator (5), but not denominator.

If the CB plan is top-heavy and you are not providing top-heavy minimum in it, I believe you will need to keep making top-heavy in DC.

[Jakyasar]

Hi Luke

Both numerator and denominator are the same.

2 active and 3 terminated, all have benefits in excess of 0.5% on the average in the past.

I am not sure about the top heavy response as no key is benefitting in either plan and only PS provisions exist, no 401k deferrals or SH.

[Luke Bailey]

Hi Jakyasar,

Denominator is at least 7 by my count (5 CB participants + 2 categorically excluded), but still more than 40% it would seem (although I am speaking only hypothetically, since have not examined plan's actual facts).

To determine whether DB plan is top-heavy you look at present value of accrued benefits, which would include for frozen plan.