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Guest cac1134

Holding TPA responsible for Top Heavy Error

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Guest cac1134

Can anyone point me to any cases where an employer held to tried to hold a TPA responsible for top-heavy contributions when the TPA failed to inform the employer that the plan failed the top heavy test?

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Don't know of a case, but you might look to written agreement (if there is one) between the employer and TPA outlining what the TPA's duties are. Also, has there been any history of the TPA for prior years so notifying the employer about top-heavy status, or being charged specifically for analysis for top-heavy status? Failing those two, other employer-customers of the TPA might be a source for establishing that the TPA's normal practice was to determine top-heavy status and notify the employer.

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Guest mjb

Q1 Does the agreement with the TPA provide that the TPA will notify the employer if a TH contribution is required?

Q2 what damages is the employer seeking?

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Guest cac1134

The agreement provides that the TPA will conduct "Code Section 416-"Top Heavy" testing" along with other administrative services.

Employer/Plan Sponsor would like to have TPA cover required top heavy contribution plus legal fees for suit. Of course, I'd like a strongly worded letter to avoid a law suit entirely, but ...

My thinking is that this would be a state court action on breach of contract; not preempted by ERISA because the contract action only tangentially "relates to" an employee benefit plan.

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Guest BXO
Employer/Plan Sponsor would like to have TPA cover required top heavy contribution plus legal fees for suit. Of course, I'd like a strongly worded letter to avoid a law suit entirely, but ...

What is the basis for having them cover the cost of the top-heavy contribution?

Would the plan not have been top-heavy if the TPA performed as it the employer expected the TPA to perform. If being top-heavy exists regardless of the TPAs actions, the employer is over-reaching in a logical sense, if not in a legal sense.

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Guest cac1134

If the TPA ran the test mid-year and told the employer, the key employees could have stopped deferrals and avoided classification as top-heavy. Unfortunately the TPA agreement is bare bones ... no required report dates, etc. Perhaps we can show that delivering a top heavy report in March 2007 for the 2006 plan year based on a 12/31/05 determination date is not standard practice.

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If the TPA ran the test mid-year and told the employer, the key employees could have stopped deferrals and avoided classification as top-heavy. Unfortunately the TPA agreement is bare bones ... no required report dates, etc. Perhaps we can show that delivering a top heavy report in March 2007 for the 2006 plan year based on a 12/31/05 determination date is not standard practice.

If the TPA ran a test mid-year the plan would still have been top heavy as the plan was top heavy on 1/1. Top heavy contributions would still be required (albeit in a smaller scale). So then, logically, we need to step back one more year to make sure that the key employees didn't defer at all.

Did the 12/31/2004 Top Heavy Testing results not show that the Key Employees balance percentage was approaching 60%? The fact that the plan was top heavy (or narrowly close to being so) should have not been a suprise to the plan sponsor even at 1/1/2006 let alone mid year. Unless, of course, the plan sponsor didn't read the TPA's annual report for 2005. To me, that's the only error here. Everything else is a lack of communication.

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Guest mjb

I dont understand the theory of liability of the TPA for the TH contributions. Since the only requirement is that the TPA perform a TH test, that test can be performed as of 2005 yr end and the employer would have to make the TH contributions under the plan. The only potential claims against the TPA would be for interest and penalities which will not be applicable if the contributions are made to a PS plan since there is no deadline for making PS contributions under the IRC. If the employer makes the contributions to the plan I doubt that there will be a suit.

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Agreed. At worst the TPA would be liable for the lost earnings & penalties. I'm not following how the TPA would be on the hook for the actual TH contribution either. Not many plans in the industry run mid year TH tests.

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P.S. delivering a top heavy report in March 2007 for the 2006 plan year based on a 12/31/05 determination date IS standard practice.

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Guest cac1134

See Reg 1.416-1 M-7 which provides that the defined contribution top heavy minimum is the key employee's percentage of comp if the percentage of comp is less that 3 percent. So. If, under a deferral only plan, 12/31/06 balances show top heavy, but keys don't defer, the percent of comp for keys is 0, so top heavy contribution is 0.

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See Reg 1.416-1 M-7 which provides that the defined contribution top heavy minimum is the key employee's percentage of comp if the percentage of comp is less that 3 percent. So. If, under a deferral only plan, 12/31/06 balances show top heavy, but keys don't defer, the percent of comp for keys is 0, so top heavy contribution is 0.

Correct. And so if any key employee made a deferral because it was believed that the plan was not top heavy and the key making the deferral would not engender any top-heavy minimum contribution requirement, then the employer has been damaged by having to make such a contribution if the employer can establish that the TPA was obligated to inform the employer of the top-heavy status at anytime before the key made the deferral.

For example, for a calendar plan year 2006, the determination date for top heavy status was 12/31/2005. If the contract or course of dealings between the TPA and the employer was that the TPA was to inform the employer of the top-heavy status for 2006 (based on the 12/31/2005 determination date) was sometime in early 2006, but the TPA did not do so and a key went ahead and made an elective deferral, then the TPA might be responsible for the top-heavy contribution triggered by the key's elective deferral under the mistaken belief that the plan was not top heavy for 2006 because the TPA had not timely informed the employer that the plan was, in fact, top heavy for 2006.

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I am not a TPA, but absent something very unusual in the engagement letter or other written agreement, I think the expectation is that the TPA is to advise in a timely manner as to all matters pertinent to compliance with ERISA and tax-qualification requirements, based on the plan design in effect. To the contrary, under a normal engagement it would NOT be expected (and a court is not likely to find) that the TPA has a duty to offer plan design recommendations early enough to avoid a TH minimum obligation, or to produce other cost savings for the employer.

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I agree. You'd also have to prove to a court that the Key Employees actually would have stopped deferring. Looks like a lot of Monday Morning Quaterbacking to me.

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First, I don't see how the TPA could be liable for making the TH contribution. As plan sponsor, the employer is the responsible party for making any TH contributions - and getting a deduction. I don't think any plan document would permit contributions by the TPA. I agree with the previous comments, if the plan is top heavy or not - does not depend on the TPA's actions.

That being said, as wsp wrote, this is a good example of poor communication/understanding. I'm sure the employer is relying on the TPA to explain to them the status of their plan and to advise them of any potential issues based on that status. If the TPA failed to timely alert the employer that the plan was approaching TH status and the impact that has, the employer may have a case that the TPA failed to provide adequate services. The employer could demand that the TPA reimburse them for any contributions required due to TH status. That is different than the TPA actually making the TH contribution.

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Guest mjb

I dont see how the TPA can be liable for the TH contributions which are required under the IRC because of the concentration of plan assets held by key ee since the TPAs duty is to report the status of the plan as either being TH or non TH as of the end of any plan yr, not prevent TH contributions being required for non key ees. This is no different than a TPA who determines that refunds have to be made to HCEs because contributions exceeded the ADP limits. Its not the TPAs fault that the contributions by HCEs have to be refunded and that the HCEs will have income taxation.

The fact that the employer had expectations that the TPA would explain the consequences of the plan's status as a TH plan to the employer does not create liability of the TPA if the agreement between the parties did not provide for such services. Its called unilaterial mistake. All TPA agreements I have reviewed only require the TPA to notify the employer if the Plan is TH as of the end of a plan yr.

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I think that the argument that the TPA's duty to an ER re TH status is only post-PY would have much more traction if TH status could only be determined definitively after the PY has ended, as is the case with ADP when current year nonHCE ADP is used. However, TH status actually depends on data as of the day before the PY even begins, and is therefore ascertainable and can be reported by the TPA to the ER early in the PY. TH status for a PY is more akin to the TPA being able to ascertain the nonHCE's ADP from the prior year, if that method is used, and advise the ER of the implications so that the HCE deferals can be pre-determined to avoid ADP failure.

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Digressing from the theoretical argument momentarily, from a practical standpoint, what is the dollar amount of the top-heavy contribution that is required?

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Guest cac1134

That's another issue. The TPA says 12,000-ish allocated among the "active" participants (defined as those deferring), excluding the keys. My reading of the regs is that the required contribution should be allocated among all eligible participants employed on the last day of the plan year regardless of whether they have completed any eligibility requirements such as 1,000 hrs and regardless of whether they have elected to defer. (remember this is a deferral only plan).

Obviously, my interpretation will increase the required contribution (a conclusion I dread communicating to the client).

I have some thoughts on the theoretical arguments, but don't have time now. maybe later.

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Guest BXO

I don't think you need to qualify your reading of the top-heavy regulations as an interpretation.

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The TPA says 12,000-ish allocated among the "active" participants (defined as those deferring), excluding the keys.

My first inclination when this thread started was to defend the TPA..........nevermind.

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Forget reading the regulations....What does the plan document say?

I'll bet it says a nonkey employee includes a participant who is eligible to defer, but does not. The lanuage in the plan document should be all the proof you need to determine the TH contribution. Yes, WDIK, the TPA should know this.

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The TPA says 12,000-ish allocated among the "active" participants (defined as those deferring), excluding the keys.

My first inclination when this thread started was to defend the TPA..........nevermind.

At least it wasn't "to be allocated among those that deferred less than 3%."

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Guest Pensions in Paradise

I still haven't seen one post which indicates how the TPA could be liable for TH contributions.

Regardless, let me ask the OP two questions. The questions are based on the assumption that we are discussing a TH contribution for the 2006 calendar year. First, on what date in 2006 did the plan sponsor provide the 2005 census to the TPA? Second, what is the first date in 2006 on which a key employee made a deferral to the plan?

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Guest Just Wondering

How would your answers change if the TPA was just now (May, 2007) performing the top heavy testing for plan years 2002-2005? The service agreement does say that the TPA will perform this test, but it was not done until now.

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