HCE excluded from allocation

[Jakyasar]

Hi

CB plan excludes non-owner HCEs.

Joe has been an employee/participant for the past 3 years and getting CB pay credit.

He becomes an HCE for 2023 under lookback rules.

This means, for 2023, Joe does not get a pay credit, correct?

Top heavy provided under DC plan.

Thanks

[Lou S.]

Correct. No principal credit in years where he is in the excluded class.

[Jakyasar]

A follow up question 

Because Joe was already part of the cb plan, he would still need to get 5% of top heavy under the dc plan, correct?

If he was never eligible to participate in the cb plan, he would only get 3% under the dc plan.

thanks

[truphao]

I think Joe gets only 3% rather than 5% in yuor example.   If I recall correctly the regs refer to "participation" or "accrual of benefit" concepts.  I would reread 416 regs Q&A Part M?

[Lou S.]

I think truphao is correct. But I'd also check the document language that coordinates 416 and confirm that it only gives him 3% and not 5%.

[CuseFan]

From TH regs, M12 - you just need to provide 3% DC.

M–12 Q. What minimum contribution or benefit must be received by a non-key employee who participates in a top-heavy plan?
A. In the case of an employer maintaining only one plan, if such plan is a defined benefit plan, each non-key employee covered by that plan must receive the defined benefit minimum. If such plan is a defined contribution plan (including a target benefit plan), each non-key employee covered by the plan must receive the defined contribution minimum. In the case of an employer who maintains more than one plan, employees covered under only the defined benefit plan must receive the defined benefit minimum. Employees covered under only the defined contribution plan must receive the defined contribution minimum. In the case of employees covered under both defined benefit and defined contribution plans, the rules are more complicated. Section 416(f) precludes, in the case of employees covered under both defined benefit and defined contribution plans, either required duplication or inappropriate omission. Therefore, such employees need not receive both the defined benefit and the defined contribution minimums.
There are four safe harbor rules a plan may use in determining which minimum must be provided to a non-key employee who is covered by both defined benefit and defined contribution plans. Since the defined benefit minimums are generally more valuable, if each employee covered under both a top-heavy defined benefit plan and a top-heavy defined contribution plan receives the defined benefit minimum, the defined benefit and defined contribution minimums will be satisfied. Another approach that may be used is a floor offset approach (see Rev. Rul. 76–259, 1976–2 C.B. 111) under which the defined benefit minimum is provided in the defined benefit plan and is offset by the benefits provided under the defined contribution plan. Another approach that may be used in the case of employees covered under both defined benefit and defined contribution plans is to prove, using a comparability analysis (see Rev. Rul. 81–202, 1981–2 C.B. 93) that the plans are providing benefits at least equal to the defined benefit minimum. Finally, in order to preclude the cost of providing the defined benefit minimum alone, the complexity of a floor offset plan and the annual fluctuation of a comparability analysis, a safe haven minimum defined contribution is being provided. If the contributions and forfeitures under the defined contribution plan equal 5% of compensation for each plan year the plan is top-heavy, such minimum will be presumed to satisfy the section 416 minimums.
 

[Bri]

Different answer if HCEs are instead put in a class allocated a contribution credit of $0, rather than excluded by class?

[Lou S.]

2 hours ago, Bri said:

Different answer if HCEs are instead put in a class allocated a contribution credit of $0, rather than excluded by class?

I think this does change the answer because they are no longer excluded. They are an active participant, just getting $0 principal credit.

It's dumb because mathematically it is the same but I'm pretty sure that is the result if you just put them in a $0 allocation group instead of excluding them from the plan.

[Jakyasar]

Good question and answer. Simply exclude, no complications.

[CuseFan]

Interesting question, because being in the plan at zero means they are not benefiting for purposes of 410(b) or 401(a)(26), so are they really "covered"? This is different than someone not accruing because they hit some limit. Also, being in a plan with a defined accrual of zero doesn't get you 415 years of participation either, in my opinion.

I do sometimes have individuals in at zero, but that's because a classification exclusion doesn't work and I'd rather specify individuals in a benefit formula than an eligible employee/excluded employee definition.