DB/DC Top Heavy Minimum Benefit (Floor Offset and Comparability Analys

[Guest]

A company sponsors a 401(k) Profit Sharing and a Defined Benefit Plan.

Client would like to satisfy top heavy requirements by showing that the sum of the hypothetical accrual attributable to profit sharing contributions and the defined benefit accrual is at least equal to the defined benefit minimum.

1.416 Q & A M-12 outlines 4 methods to satisfy the minimum benefit requirements if participation is in both a DB and DC plan:

1. Provide DB Minimum

2. Floor offset approach (Rev. Rul. 76-259)

3. Comparability analysis (Rev. Rul. 81-202)

4. 5% DC contribution

Is the comparability analysis under Rev. Rul. 81-202 still a valid method to satisfy the minimum benefit requirements? (I ask because I have had difficulty finding the cite on a internet research network).

Can the Floor offset approach be used if the actual DB formula does not use a floor offset?

[Guest]

You'll be much safer to use the cross-testing rules in 1.401(a)(4)-4(B).The methodology is similar to 81-202,but more stringent. RR 81-202 only required that the calculations be done with reasonble assumptions. The cross-testing rules specify a testing age,list safe harbor interest and mortality,and prohibit accumulation with mortality.

As far as the plan document is concerned, the normal retirement benefit does not have to be a floor-offset. But you will have to specify the offset approach in the section that deals with top heavy. your plans probably now have the standard language that say that the minimum is satisfied in one plan or the other.

[David]

This is new to me, and if I understand you, it could be very helpful for a couple of clients. Are you saying that if the DC plan employer contribution when converted to an equivalent benefit at the DB plan RA is greater than or equal to 2% of pay, then the plan meets the TH minimum benefit/contribution requirement (even though the actual contribution is less than 5%)?

[Guest]

The 5%is a safe harbor. It's meant to approximate the DB minimum which the IRS always considers the most valuable. If you can show by testing that the DC minimum gives you the same result you're OK.

Don't get too excited over this.It's rarely used because it's hard to explain and can get complicated. Remember,you're cross-testing ,so a relatively small contribution will work for a younger non-key,but what about a 50-year old? Will your client appreciate what you've done and will he pay for it?Anyway, good luck.

[AndyH]

Many of our plans have the top heavy benefit be offset by the act equiv of a dc allocation, but I haven't personally designed any that have that provision.

I think sdolce's comments about using the cross testing assumptions are very good points.