3800. What special qualification requirements apply to top-heavy plans?Nuco Employeercline202014-08-17T15:06:00Z2014-08-17T15:06:00Z513747835Summit Business Media6518919114Site Map/Retirement Plans/Pension And Profit Sharing/Qualification/Top-Heavy Plan RequirementsSite Map/Retirement Plans/Quick Clicks/Top Heavy top heavy fast vesting key employee2005-01-25T00:00:00ZTaxFactsDefaultArticle116150353-00-tf1.xml355.00;#2256;#2286;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1What are the special qualification requirements that apply to top-heavy plans?56500.0000000000TaxFactsDefaultArticle2010-01-19T08:15:58ZSBMEDIA\moss-admin4111dbb3-6119-41fc-9d9c-28768801cec4|c07598e2-77e5-4528-83dd-9c908aa593d7|afcc9c1b-b20e-4fc6-8d34-ce67b26bffd03800. What special qualification requirements apply to top-heavy plans?In addition to the qualification requirements that apply to qualified plans generally (Q 3736), special requirements are imposed by the IRC on top-heavy plans. In addition, top-heavy simplified employee pension plans are required to meet certain minimum contribution requirements. In applying these requirements the common control, controlled group, and affiliated service group aggregation rules apply (Q 3807, Q 3809). Under some circumstances, “leased” employees may be imputed to an employer (Q 3803).Guidelines for applying the top-heavy rules may be found in Treas. Reg. §1.416-1. The following requirements must be met by top-heavy plans in general; top-heavy simplified employee pensions must meet only the minimum contribution requirements discussed below.Fast VestingA top-heavy plan must provide that an employee has a non-forfeitable right to his or her accrued benefit derived from employer contributions in accordance with one of the two following requirements:1.Three-year vesting. An employee who has completed at least three years of service with the employer must have a non-forfeitable right to 100 percent of his or her accrued benefit.IRC Sec. 416(b)(1)(A).2.Six-year graded vesting. An employee who has completed at least two years of service must have a non-forfeitable right to at least the following: 20 percent of his or her accrued benefit after two years of service, and 20 percent additional for each of the following years of service, reaching 100 percent after six years of service with the employer.IRC Sec. 416(b)(1)(B).Except to the extent that they are inconsistent with these fast vesting schedules, the rules that pertain to vesting in qualified plans generally (including years of service and breaks in service, etc.) apply for purposes of the fast vesting requirements.IRC Sec. 416(b)(2); see Treas. Regs. §§1.416-1, V-1; 1.416-1, V-2. Thus, the fast vesting schedules are not safe harbors; even faster vesting may be required by IRC Section 411(d) where there is a pattern of abuse (Q 3763).When a plan becomes top-heavy, fast vesting under one of the two schedules generally must be applied to all benefits accrued under the plan for the current plan year and all prior plan years (including benefits accrued in years before the plan became top-heavy and benefits accrued before the effective date of the top-heavy rules). The accrued benefit of any employee who does not have an hour of service after the plan became top-heavy, and any accrued benefits that were forfeited before the plan became top-heavy, need not be covered by the fast vesting schedule.Treas. Reg. §1.416-1, V-3.Although the IRC does not require that fast vesting be applied to benefits accrued in future plan years in which a plan is not top-heavy, a return to the plan’s slower vesting when the plan ceases to be top-heavy in many cases may be impractical or impossible. For example, IRC Section 411(a)(10) requires that a change in vesting schedules not reduce a participant’s non-forfeitable percentage in his or her accrued benefit and that certain participants be allowed to elect to be covered by the previous vesting schedule (Q 3763).See Treas. Reg. §1.416-1, V-7. For additional rules regarding vesting in a top-heavy plan, see Treasury Regulations §§1.416-1, V-5 and 1.416-1, V-6. Minimum Benefits and ContributionsFor any top-heavy plan year, a plan generally must provide a minimum benefit or contribution for each non-key employee who is a participant.IRC Sec. 416(c); Treas. Reg. §1.416-1, M-1. Integration (i.e., permitted disparity) must be disregarded for purposes of determining a minimum benefit or contribution.Defined benefit plans. A top-heavy defined benefit plan generally must provide an accrued benefit derived from employer contributions for each non-key employee participant that, when expressed as an annual retirement benefit, is not less than the participant’s average compensation multiplied by the lesser of 2 percent for each year of service with the employer or 20 percent.For the non-key employees for which a minimum benefit is not required, see Treasury Regulation §1.416-1, M-4.Years of service are the same as the “years of service” taken into account for the ordinary vesting rules (Q 3763), but years of service in which non-top-heavy plan years end are not counted for this purpose; years in which no key employee or former key employee benefits under the plan also are not counted.IRC Sec. 416(c)(1)(C)(iii).Average compensation is a participant’s average annual compensation for the period of consecutive years (not exceeding five) during which the participant had the greatest aggregate compensation from the employer.IRC Sec. 416(c)(1)(D)(i). Compensation for any year that is not a year of service is disregarded.IRC Sec. 416(c)(1)(D)(ii). Similarly, unless the plan provides otherwise, compensation (Q 3761) for any year beginning after a plan has ceased forever to be top-heavy, is not counted.IRC Sec. 416(c)(1)(D)(iii). Annual retirement benefit means a benefit payable annually in the form of a single life annuity (with no ancillary benefits) beginning at the normal retirement age under the plan.IRC Sec. 416(c)(1)(E); Treas. Regs. §§1.416-1, M-2, 1.416-1, M-3.For the application of the minimum benefit requirement to a defined benefit plan funded exclusively by level premium insurance contracts, see Treasury Regulation Section 1.416-1.Treas. Reg. §1.416-1, M-17. Defined contribution plans. For each plan year in which a defined contribution plan or simplified employee pension plan is top-heavy, employer contributions and forfeitures allocated to the account of each non-key employee participant must not be less than the amount that is calculated by multiplying the participant’s compensation by the lesser of 3 percent or the percentage that is the highest contribution rate made for a key employee.IRC Sec. 416(c)(2); Treas. Reg. §1.416-1, M-7 to M-9.For purposes of determining the highest contribution rate received by a key employee, employer contributions and forfeitures made on behalf of each key employee under the plan or, if the plan is part of a required aggregation group (Q 3795), all defined contribution plans included in the group, are divided by his or her total compensation for the year (but not more than $260,000, as indexed for 2014, up from $255,000 in 2013).IRC Sec. 401(a)(17); Treas. Reg. §1.416-1, M-7; Notice 2012-67 (Dec. 10, 2012); IR-2013-86 (Oct. 31, 2013).Although employer contributions attributable to salary reduction or similar arrangements may not be disregarded when calculating the minimum contribution requirement for a top-heavy defined contribution plan, these contributions may not be used to satisfy the top-heavy minimum contribution requirement.Treas. Reg. §1.416-1, M-20. Non-elective contributions and employer matching contributions may be used to satisfy the minimum contribution requirement, but such amounts generally cannot then be used in the ACP or ADP test (Q 3709, Q 3710).Treas. Regs. §§1.416-1, M-18, 1.416-1, M-19. For application of the minimum contribution requirement in the case of a plan that has received a waiver of the minimum funding requirements, see Treasury Regulation Section 1.416-1. Treas. Reg. §1.416-1, M-9. If a top-heavy defined contribution plan required to be included in an aggregation group (Q 3795) with a discriminatory defined benefit plan enables that defined benefit plan to satisfy the nondiscrimination requirements of IRC Sections 401(a)(4) and 410, the minimum contribution is 3 percent of the participant’s compensation, and the highest contribution rate for key employees is disregarded.IRC Sec. 416(c)(2)(B)(ii)(II).Defined benefit and defined contribution plans. Although an employer that maintains both a top-heavy defined benefit plan and a top-heavy defined contribution plan is not required by the top-heavy rules to provide a non-key employee who participates in both plans with a minimum contribution and a minimum benefit, the non-key employee may not receive less under the combined plans than he or she would if he or she participated in only one of the plans.See TEFRA Conf. Rep., 1982-2 CB 677; see IRC Sec. 416(f). The regulations provide four safe harbor rules a plan may use to determine the minimum an employee must receive.See Treas. Reg. §1.416-1, M-12.Collective bargaining units. The minimum contribution and minimum benefit requirements do not apply in the case of any employee covered by a collective bargaining agreement if there is evidence that retirement benefits were the subject of good faith bargaining.IRC Sec. 416(i)(4).IntegrationAlthough the IRC does not prohibit integration in a top-heavy plan, the fast vesting and minimum benefit (and contribution) requirements above must be satisfied without taking into account employer payments of FICA taxes or contributions or benefits made or received under any other federal or state law.IRC Sec. 416(e).