Frozen Top Heavy DB

[Dougsbpc]

We administer a 15 participant defined benefit plan that was frozen 2 years ago. For plan years beginning in 2002, the top heavy minimum is no longer provided. This employer also sponsors a salary deferral only 401(k) plan.

This employer wishes to provide another year of top heavy minimum benefits to participants of its defined benefit plan. The 401(k) document indicates that the 2% top heavy minimum is provided for in the DB.

Question: If a key employee makes say a 5% of pay salary deferral in the 401(k), wouldnt that then require the frozen DB to provide the 2% top heavy minimum for 2002?

We realize we could unfreeze the plan and change the benefit formula to 2% for each year of participation up to 10 years, but would prefer not to.

Anyone have any comments about this?

Thanks DK

[WDIK]

I just finished lunch, so all of the blood has left my brain and gone to my stomach, so someone correct me if my logic here is flawed.

1) The combination of a frozen defined benefit pension plan (where the appropriate EGTRRA amendment was adopted) and a deferral only 401(k) plan should not require any top-heavy minimum contributions. If any employer matching or discretionary contributions are made to the 401(k) plan, this could require top-heavy minimums.

2) Part of the post sounds like the employer is not trying to avoid a contribution but wishes to make it under the defined benefit plan rather than the 401(k). If the EGTRAA amendment was not adopted, the defined benefit plan would still be required to pay top-heavy minimums, just as the employer desires.

[Guest merlin]

Are there any HCEs in deferring? If so, then you've got to allocate a t/h minimum in the k plan.

[Guest merlin]

Sorry, there should have been more to my answer. Assuming the plans are a top heavy group and there are Keys (not necessarily the same as HCEs) deferring, you've got to give a minimum somewhere. If the db plan has been amended to remove the minimum before any nonkey has accrued a minimum, then the minimum should be written into the k plan. If you're giving it in the k, the question becomes "How much?"'. Most people I've spoken to agree that if there is no longer a minimum in the db plan the rules about the db minimum being the more valuable become meaningless, and you can give the usual 3% or the highest amount allocated to or deferred by a Key,if less than 3% in the dc plan.

If the db was not amended timely, you'll have to give the minimum in the db plan.

[mwyatt]

1) The combination of a frozen defined benefit pension plan (where the appropriate EGTRRA amendment was adopted) and a deferral only 401(k) plan should not require any top-heavy minimum contributions. If any employer matching or discretionary contributions are made to the 401(k) plan, this could require top-heavy minimums.

Actually, I think you're misreading the EGTRRA changes. A "safe harbor" 401(k) plan is no longer deemed a top heavy plan (of course you're giving the same 3% one so the difference in cost is less valuable than it appears); however, a pure deferral only 401(k) is still subject to 416 requirements.

[WDIK]

mwyatt is correct. Thanks. (I did give fair warning.)

[Blinky the 3-eyed Fish]

Okay, we know that EGTRRA removed the requirement for a frozen DB plan to provide a TH minimum benefit. Also, in my experience the chances are that the language referred by the first post, "The 401(k) document indicates that the 2% top heavy minimum is provided for in the DB." is only effective if a participant is a participant in both a DC and DB plan of the employer. I also haven't seen that the EGTRRA amendments for DC plans mention at all the changed TH requirements regarding DB plans.

So that being said, we have a case where the DC language in the plan document is outdated and requires participants in both a DC and DB plan to receive the TH minimum in the DB plan, but the DB plan, if EGTRRA is adopted, no longer had the mechanism to provide the TH minimum in that plan. Perhaps there is some overriding document language in this case, but there is the potential problem.

Now, in this situation, the client wants to provide an additional year of top heavy in the DB plan. So, if EGTRRA has been adopted in the DB plan, simply do an amendment and make the frozen TH provision effective in 2003. If EGTRRA has not been adopted, then you already need to provide the 2002 TH minimum in the DB.

[Dougsbpc]

Thanks all for the replies.

In this case all employees participate in both plans.

The plan sponsor executed an EGTRRA good-faith amendment back in April 2002. Their plan year ends 9/30/2003. My understanding is that we must administer the plan in accordance with EGTRRA and 416©(1) for plan years beginning in 2002. Can we really amend (or do we really have the choice) the plan to make the provision effective for plan years beginning in 2003? That would be great if we could.

If this is possible, I would think a key employee could make any deferral (even 1% of pay) in the 401(k) and trigger the 2% top heavy minimum in the DB. And again, the 401(k) document indicates top heavy minimums are provided in the DB plan.

[Blinky the 3-eyed Fish]

Keep in mind I am only talking about making the removal of the top heavy requirements for a frozen DB plan effective in 2003, not the other required TH changes.

[Dougsbpc]

Yes. That is what I was thinking too. We would only remove the top heavy minimum requirement with respect to a frozen DB effective for plan years beginning in 2003.