Cash Balance Plan Eligibility + 401(a)(26) Question

I have a client with 2 owners and 2 employees. Under the 40% rule, I can provide meaningful benefits to the 2 owners only.

Can I set up a cash balance plan with 2 owners only?

Adoption Agreement says that we cannot exclude anyone in favor of HCEs. So, the only other way around is to offer eligibility to everyone but give $0 benefits to the 2 non-owner employees. Is this how it is normally done? It appears counterintuitive that you tell them they are eligible to become participants in the plan but with $0 benefits. Also, how does it affect other administrative compliance requirements such as SPDs, SARs, etc.?

Thanks!

There are several non-discrimination tests that must be satisfied.  410(b), 401(a)(4), and 401(a)(26) are the big ones.  The 40% rule is in 401(a)(26), so yes, you can create a DB plan that only benefits 2 HCEs, but you still need a way to satisfy 410(b), 401(a)(4), and the Top Heavy rules of 416.  IOW, you will need a generous DC plan for the NHCEs.  

I wouldn't recommend creating an HCE only DB plan with a group this small.  If/when someone leaves, or they hire a few more people, you will need to add people to the DB.  Typical design would be include everyone in DB, give small benefit to NHCEs in DB plan (enough to "benefit"), and use the DC plan to satisfy the other requirements. 

Also, make sure that no one is "otherwise excludable", which might lower your count. 

Another potential primary reason to include the staff in the plan is whether or not you want it subject to the PBGC (depending on industry) to get higher deductions for the combo.  

From the eligibility question, I don't think there is a way to "officially" exclude them. My question was whether the client could give NHCEs $0 benefit under the DB plan. Yes, the current proposal provides very generous benefits to one of the NHCEs whose pay is really low and the minimum amount necessary for the other NHCE to satisfy nondiscrimination and Top-Heavy requirements.

If your document does not allow an exclusion, like a standardized document? Then I would look around for a nonstandardized document to use instead. 

19 hours ago, NewBieHere said:

From the eligibility question, I don't think there is a way to "officially" exclude them. My question was whether the client could give NHCEs $0 benefit under the DB plan. Yes, the current proposal provides very generous benefits to one of the NHCEs whose pay is really low and the minimum amount necessary for the other NHCE to satisfy nondiscrimination and Top-Heavy requirements.

There are documents that allow for their exclusion, yours may or may not be one of those documents.

You can have them eligible but getting zero benefit if the plan allows for different benefit structures. I believe that also makes them participants for 5500 purposes (and SARs, SPDs etc.) and for PBGC coverage and premium purposes too. That can be a plus or a minus depending on what you are trying to accomplish.

Thanks, everyone! You guys rock!