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Top Heavy Fix Basics


rushlakeguy

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23 minutes ago, 401king said:

If you were Top Heavy in 2015 then why were you not aware that you were Top Heavy for 2016?

When I talked to the Paychex rep, they said my return of excess in March-16 would adjust down my balance and that I should have no problem being under 60% (ie it would get applied back to the 12/31/2015 test date).  

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I understand your frustration.  As I could have predicted, there is now confusion regarding the timing of various things.  Now, I'll go further.  Not only is it true that nobody can definitively answer your questions without seeing a copy of the plan document that you signed, but they would need to see the administrative reports for each year the plan has been in existence along with a detail transaction ledger of all deposits (contributions, deferrals) and all withdrawals showing the reason for the deposit/withdrawal.

There is no shortcut.

Good luck.

 

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52 minutes ago, rushlakeguy said:

Can you walk me through how you get to 7/1/2015 in your first paragraph?

Ooops.  Never mind.  I was basing my answer on a 1-yr wait, not six months.

I have since edited my post.

Sorry for any confusion... :(

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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1 hour ago, rushlakeguy said:

When I talked to the Paychex rep, they said my return of excess in March-16 would adjust down my balance and that I should have no problem being under 60% (ie it would get applied back to the 12/31/2015 test date).  

Something just seems "off." So they returned excess contributions for 2015 testing. Then, in 2016, you only made contributions of 1% of combined earnings for the Keys. Was your 2015 refund less than your 1% contributions?

R. Alexander

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11 minutes ago, 401king said:

Something just seems "off." So they returned excess contributions for 2015 testing. Then, in 2016, you only made contributions of 1% of combined earnings for the Keys. Was your 2015 refund less than your 1% contributions?

Correct.  They returned about $10k in Mar-16.  The returned amounts are included in the 12/31/2015 settlement date calculation however.     I then made 1% contribution in 2016. 

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1 hour ago, rushlakeguy said:

Correct.  They returned about $10k in Mar-16.  The returned amounts are included in the 12/31/2015 settlement date calculation however.     I then made 1% contribution in 2016. 

Well in one of the wonderful (and I use that term loosely and sarcastically here) quirks of the IRC, while you got the pleasure of taking that back as taxable income and not get it in the plan tax deferred you get the pleasure of counting it towards the 12/31/15 balance for the TH determination and as BG5150 correctly pointed out a while ago it gets to hang around added back in for the next 5 years as an in service distribution.

Sometimes I think they write these laws with philosophy of - "How can we possibly make this make the least amount of senses and be the most complicated to run"

But if I'm reading the rest of your responses and questions in the thread correctly it sounds like you'll owe 1% to everyone who met the 6 months eligibility who did not terminate employment prior to 12/31/16.

It is possible you can offset some of this if there are forfeitures from your prior top heavy minimum.

I wish you luck. For what it is worth it sounds to me like you are going to have this problem basically forever so you might want to consider changing the plan design to something t hat will automatically pass testing like a Safe-Harbor 401(k) (2018 the earliest you can do this) or perhaps some other plan might suit your business needs better.

I will echo others who suggest you reach out to a qualified TPA in your local area. It is possible you accountant could suggest one or two to interview.

 

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13 minutes ago, Lou S. said:

Well in one of the wonderful (and I use that term loosely and sarcastically here) quirks of the IRC, while you got the pleasure of taking that back as taxable income and not get it in the plan tax deferred you get the pleasure of counting it towards the 12/31/15 balance for the TH determination and as BG5150 correctly pointed out a while ago it gets to hang around added back in for the next 5 years as an in service distribution.

Sometimes I think they write these laws with philosophy of - "How can we possibly make this make the least amount of senses and be the most complicated to run"

But if I'm reading the rest of your responses and questions in the thread correctly it sounds like you'll owe 1% to everyone who met the 6 months eligibility who did not terminate employment prior to 12/31/16.

It is possible you can offset some of this if there are forfeitures from your prior top heavy minimum.

I wish you luck. For what it is worth it sounds to me like you are going to have this problem basically forever so you might want to consider changing the plan design to something t hat will automatically pass testing like a Safe-Harbor 401(k) (2018 the earliest you can do this) or perhaps some other plan might suit your business needs better.

I will echo others who suggest you reach out to a qualified TPA in your local area. It is possible you accountant could suggest one or two to interview.

 

It's so frustrating.  Would the IRS really disqualify the plan with me being at 60.7% under these circumstances?

It's actually not 1% we owe, but 3%.  I misspoke.

You bring up a good point about forfeitures.  There are a few people who were paid Top Heavy Contributions for the prior year that are no longer with the company.  How do I claw those back?

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I reached out to rushlakeguy behind the scenes and got a little information.  As we all know, there are at least a million different possibilities until you get the actual numbers and facts.  I think that was Mike Preston's point all along.

Basically, the Key Employee Balances exceed 60% of plan assets by only $569.10.  Without any employee hardships, loan defaults, or ANY types of inservice distributions during the past 5 years that may be worked back in, you have a top heavy plan.

BUT.... Let looks at a potential grey area for a moment.

We know that for purposes of determining the balances on the determination date, you're not allowed to use discretionary profit sharing contributions deposited in the following year but made 'as of' that date.  There is an exception for the first plan year; where potentially the trust balance is zero on that date and the 'accrued contributions' are all you have.

We also know that plan subject to the funding requirements of Section 412 (e.g. Money Purchase Plans) would have those required contributions considered as part of the plan's balance on the determination date; even though they will be deposited within 8-1/2 months after that date.

But what about the Required Top Heavy Minimum Contribution for the 2015 Plan Year that was actually deposited in 2016.  It has the same characteristics of a 412 funding requirement (in that it MUST be made and not subject to the discretion of the employer), but it is not an actual funding requirement under Section 412.

It may be an interesting argument presented to the IRS during a hypothetical audit that the $10,000 funded to those non-key employees for the 2015, but deposited in 2016, gets accrued to the balances of the non-key employees since it was required to be made in a manner similar to a 412 funding requirement.

What do you think?

 

CPC, QPA, QKA, TGPC, ERPA

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I think you have it backwards, but we end up in the same place.  

There is an old post of Tom's which goes into the details so I won't go into them again here (He cites a published ASPA Q&A on the issue).  As detailed in the ASPA Q&A the IRS has stated rather vociferously from the podium that the account balance, as that term is used in its most technical sense for top-heavy determination purposes, includes the accruals, even in a profit sharing plan.  

It has been my position (as well as the position of others in the industry like Sal and the 401(k) Answer Book) that the language of the regs precludes including profit sharing accruals and that they conform to what you have said: you include only legally required accruals which would typically ignore profit sharing plan accruals.

So a plan sponsor can choose which position they feel is best for them with very little exposure.

Here is a link to that old thread.  Tom's post is not at the top, but it shouldn't be too hard to find.

mike

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12 hours ago, rushlakeguy said:

It's actually not 1% we owe, but 3%.  I misspoke.

If the highest Key employee allocation, including deferrals, is only 1% of their pay, then all you owe is 1% TH.  After the "your refund will help you not be top heavy" gaffe, I wouldn't trust your provider much, if at all.

My suggestion is take your business to a reputable TPA in your area.  The administration may cost a little extra, but I think it would be worth the piece of mind knowing things are running correctly. 

Another question to ask yourself:  if they messed up the TH thing, what else have they missed or got wrong?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Side note:  as someone mentioned before, you may want to think about changing your plan design.  A Safe Harbor Match could be the way to go.  The top match is 4% of pay, only for those deferring 5% or more of their own pay.  This way, the partners can defer as much as they'd like without fear of refunds.  Also, if the match is the only employer contribution, it will satisfy the TH minimum no matter how many people defer.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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45 minutes ago, BG5150 said:

I

My suggestion is take your business to a reputable TPA in your area.  The administration may cost a little extra, but I think it would be worth the piece of mind knowing things are running correctly. 

 

Here is what I tell clients all the time about my fees and the fees of other good TPAs.  It is cheap insurance.  By that it tends to save you money in the long run.  I am not trying to rub salt into an open wound here but the little extra you would have paid a TPA would have saved you the cost of the TH contributions.  You can either pay for good advice up front to avoid problems or pay for good advice on how to clean things up.  In the end you will pay for good advice.  This is field is too complex to use the cheapest provider in my mind but I could be seen as have a self-interest in my own advice so do what you want with it. 

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1 hour ago, ESOP Guy said:

Here is what I tell clients all the time about my fees and the fees of other good TPAs.  It is cheap insurance.  By that it tends to save you money in the long run.  I am not trying to rub salt into an open wound here but the little extra you would have paid a TPA would have saved you the cost of the TH contributions.  You can either pay for good advice up front to avoid problems or pay for good advice on how to clean things up.  In the end you will pay for good advice.  This is field is too complex to use the cheapest provider in my mind but I could be seen as have a self-interest in my own advice so do what you want with it. 

I hear ya and we will be switching, but keep in mind this wasn't a situation of us selecting the cheapest provider.  We're actually paying Paychex a decent chunk of change for our HR services.  All the more frustrating

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15 minutes ago, rushlakeguy said:

We're actually paying Paychex a decent chunk of change for our HR services

Use this as an excuse to keep Paychex for only one purpose: Paychecks. This may not be the last of your unexpected HR expenses brought on by them. 

R. Alexander

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3 hours ago, rushlakeguy said:

I hear ya and we will be switching, but keep in mind this wasn't a situation of us selecting the cheapest provider.  We're actually paying Paychex a decent chunk of change for our HR services.  All the more frustrating

We are a TPA/Actuarial firm and use Paychex for payroll (not our plan). We started using them for HR stuff a few months ago. It became painfully obvious very quickly that they didn't know what they were doing in that area and we've terminated that service.

So be careful about the HR stuff as well.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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I just want to thank everyone for their assistance with my situation, everyone in this thread and also from ETA Consulting separately. 

I'm moving forward under the assumption that I am not top-heavy in 2016 because the contributions for being top-heavy in 2015 should have been accrued at 12/31/2015.  As such, I'm not on the hook for $48k.

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