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Top Heavy Calc: inactive employee - include?


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Participant has been working part time for years, under 1000 hours.

In last plan year they worked zero hours, but they are not formally terminated.

My recordkeeping system has excluded them from the Top Heavy Test. But his balance is so large, that it makes a difference whether the plan is top heavy or not.

Include or exclude him?

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Could you provide a bit of clarification? Is this person a Key Employee? Or Non-key? Or Former Key? And when you say "in the last plan year" do you mean the last Plan Year PRIOR to the Plan Year for which you are performing the valuation?

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7 hours ago, Belgarath said:

Could you provide a bit of clarification? Is this person a Key Employee? Or Non-key? Or Former Key? And when you say "in the last plan year" do you mean the last Plan Year PRIOR to the Plan Year for which you are performing the valuation?

Thank you for your interest in my question.

Participant is non key and has never been key.

This calculation is as of determination date 12/31/21 for plan year 2022.

They were included in all prior calculations.

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Quote

 

§416(g)(4)-(E) Benefits not taken into account if employee not employed for last year before determination date

If any individual has not performed services for the employer maintaining the plan at any time during the 1-year period ending on the determination date, any accrued benefit for such individual (and the account of such individual) shall not be taken into account.

 

I think they are excluded from the test since from your original post it appears they have "not performed services" even if they are not technically terminated.

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The status of non-owner related 'inactive' employees who are not working hours but not terminated on the books has always been a challenge for me. With the ADP test for instance, 5500 employee counts etc.

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That is an issue for us specially with dental clients.  They have former employees who cover for vacations and may go a year without working and so there is no termination date in the census and thus show up in testing.  

 

 

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This issue is somewhat "gray" IMHO, and I have seen it interpreted both ways. The "not employed" language seems to leave some room for argument when the employee isn't officially "terminated" as in your exact situation. I'm very inclined towards Lou's interpretation. As a practical matter, how would the IRS even prove that the employee wasn't "terminated" if they audited. No hours, no compensation, etc. - I wouldn't classify it as a "high risk."

If there's a lot of money at stake, might be worth getting an opinion from ERISA counsel, although even that isn't going to help if the IRS disagrees.

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12 hours ago, Belgarath said:

"not employed" language

 

On 6/22/2022 at 2:23 PM, Lou S. said:

If any individual has not performed services for the employer maintaining the plan at any time during the 1-year period ending on the determination date

Belgarath, I'm sympathetic, but the statutory language quoted by Lou S. (which I don't think is elaborated on in the regs) says "has not performed services," not "not employed." It seems to me that "has not performed services" is a more objective, less metaphysical determination than "not employed."

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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8 hours ago, Luke Bailey said:

 

Belgarath, I'm sympathetic, but the statutory language quoted by Lou S. (which I don't think is elaborated on in the regs) says "has not performed services," not "not employed." It seems to me that "has not performed services" is a more objective, less metaphysical determination than "not employed."

According to the quote, the sentence is preceded by: Benefits not taken into account if employee not employed for last year before determination date.

I would say it's still objective.

btw, Plan Sponsor is going to have that inactive employee work during current plan year so that the plan will not stay Top Heavy.

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Thanks Luke. If you note in my response above, [I'm very inclined towards Lou's interpretation.] I agree with Lou (and you) in general, practical terms. I just don't believe that it is ironclad. As an administrative issue, would I use the more common sense approach and exclude them? Likely yes, possibly subject to facts and circumstances.  It's mostly that over many years of doing this garbage, I've developed a ?healthy? fear of absolute statements where there may be room for interpretation.

I've never seen this issue raised with the IRS at ASPPA conferences, etc. - are you aware of any such unofficial musings by the IRS one way or the other?

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7 hours ago, Belgarath said:

Thanks Luke. If you note in my response above, [I'm very inclined towards Lou's interpretation.] I agree with Lou (and you) in general, practical terms. I just don't believe that it is ironclad. As an administrative issue, would I use the more common sense approach and exclude them? Likely yes, possibly subject to facts and circumstances.  It's mostly that over many years of doing this garbage, I've developed a ?healthy? fear of absolute statements where there may be room for interpretation.

I've never seen this issue raised with the IRS at ASPPA conferences, etc. - are you aware of any such unofficial musings by the IRS one way or the other?

There may be some facts and circumstances that would give weight to the argument that the person in question who did not receive compensation for the entire year was still in fact employed and did performer services for the period. I'm not a lawyer and wouldn't want to argue said facts before an IRS auditor if it came to it.

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