Should an individual who receives only the top-heavy minimum contribut

[John A]

In a top-heavy plan, if a non-key employee receives only the top-heavy minimum contribution of 3% of pay (worked only 100 hours during year and so did not qualify for full contribution), is that employee considered to "benefit" for 410(B)?

Reg. 1.401(a)(4)-2(B)(4)(vi)(D)(3)says, in part: "...the top-heavy formula does not fail to be available on the same terms as the other formulas under the plan merely because it is available to all employees described in §1.416-1, Q&A M-10 (i.e., all non-key employees who have not separated from service as of the last day of the plan year). The preceding sentence does not apply, however, unless the plan would satisfy section 410(B) if all employees who are benefiting under the plan solely as a result of receiving allocations under the top-heavy formula were treated as not currently benefiting under the plan. "

This makes it appear that employees should be treated as not benefiting if they only get the top-heavy minimum.

However, IRS alert guideling Explanation No. 5 says, in part "... However, if the plan is required to provide top-heavy accruals for the plan year, or if the plan takes future compensation increases into account in determining accrued benefits, the plan will have to be tested for coverage." Although this seems to refer to DB plans, it also seems to imply that top-heavy minimums would be tested under 410(B).

So if someone only receives the top-heavy minimum contribution, are they treated as benefiting under 410(B)? Are they left out of 410(B) coverage testing completely? Thanks for any opinions.

[Lynn Campbell]

There is a similar question under this topic:

How are top-heavy testing and 410(B) testing coordinated?

at

http://benefitslink.com/boards/index.php?showtopic=4886

[KJohnson]

My understanding is that they are included in 410(B) for coverage testing.

However, if you are using 401(a)(4) safe harbor you then have to perform your coverage test again excluding these individuals. If you don't pass when they are excluded then you can't use the safe harbor. All this means is that you will have to test for discrimination but it should have no effect on coverage.

[John A]

Thanks, Lynn and K Johnson. So my understanding is:

For purposes of 410(B), an employee who receives only a top-heavy contribution is considered as benefiting under the plan, and therefore is not an excludable employee (one of the requirements for being able to exclude certain terminated employees is that they do not benefit under the plan). So do 410(B) test including employees who only receive top-heavy contributions.

If the plan is not relying on a safe-harbor formula under 401(a)(4) (a new comparability plan, for example), then the employee who only received the top-heavy contribution has no effect on the testing. If the plan is relying on a safe-harbor formula under 401(a)(4) (a uniform % of pay, for example), then 410(B) test must again be done excluding employees who receive only a top-heavy contribution, but this test is only for checking 401(a)(4), not 410(B). If test passes, then no additional 401(a)(4) testing needs to be done. If 410(B) test would fail when excluding employees who only receive top-heavy contribution, then 401(a)(4) testing must be done to show non-discrimination in amount, probably by doing cross-testing. In a plan that provided a 7% profit sharing contribution, this would be the same as testing a plan which specifically provided a 7% contribution to a certain group of employees and a 3% (assuming the top-heavy minimum is 3%) contribution to the different group of employees that only received 3%.

[John A]

One further question: when you redo the 410(B) test (for 401(a)(4) purposes) treating the individuals "as if they were not benefiting", are these individuals treated as includable but not benefiting, or can they also be treated as if they were excludable (if they met the other requirements for being excludable - terminated with less than 500 hours, etc.)?