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Any semi-competent TPA will be able to answer your questions if you can provide them with some basic information on the employee populations of A and New DBA.

A plan becoming top heavy because of contributions made by key employees for their own benefit is not the result of an "error". The entire premise is just wrong. If they don't like having to put minor amounts away for the non-key employees, then the key employees should just save what they can on an after tax basis and pay taxes on the investment income. If they want to receive tax-favored treatment, they have to jump through the relevant hoops. From the standpoint of the general taxpaying population and the government, for owners and officers to receive a tax-favored way to save, they need to kick in enough for their other employees to help reduce the risk of those other employees becoming wards of the state after they are unable to continue working due to age or infirmity. No sympathy for people who act as though they are allergic to having to pay taxes or to share in a meaningful way with the people making their success possible.

You raise a lot of issues in your post. From the 401(k) (or other qualified retirement plan), you can always INCLUDE anyone, anywhere. indeed, a U.S. citizen working abroad is not a "statutorily" excludible class of participants implying they clearly are "includible." It would require some clear plan language to include only the ex-pats and not the other employees, but it can be done. Now for the can of worms.... What I just said is from the U.S. perspective, concerning U.S. law. What Chilean law says is another matter. Participation in such an extraterritorial (from Chile's perspective) plan may or may not be permitted, and most likely there would be no Chilean income tax advantages to such participation. In addition, in SOME countries, being covered by a private pension arrangement (DB or DC) may have consequences on your ability to earn benefits under the country of residence equivalent to "Social Security" (if they have one). Best to involve benefits experts with international experience on the team to vet ALL of the issues. As far as medical plans go, that is probably even more difficult (due to single payer systems, local control, and even the ability cover someone really, really out of network). Again, seek expertise in international benefits before proceeding. In some cases, at least on the retirement plan side, a non-qual plan in the US covering the ex-pats may be a viable option....

It is wrong in so many ways that it is hard to even know where to start. ERISA and the Code do not address whether it is un-American or not. On the IRS side, a plan, in order to be "qualified" must satisfy certain requirements in both form and operation. A plan that violates its provisions, such as required top heavy contributions, is subject to disqualification. I'll guarantee that your plan document does not provide for the return of contributions by Key Employees on the off chance that they discover too late that the plan is top heavy, or that they didn't understand or were unaware of the implications of top heavy status. On the ERISA side, you have various anti-alienation provisions. When people are entitled to a benefit (as with non-key employees who are entitled to a top heavy benefit under the terms of the plan) you can't take that away from them. There is no regulation that provides an override to the top heavy requirements such as you would like. So you are stuck with what the Code and Regulations say that you must do, which in this case, would be to contribute any required top heavy contribution. I really recommend that you seek legal counsel first if you are planning to advise your client to treat this as "administrative error" - and review the terms of your E&O policy. You are really getting into some dangerous territory. All this is just my opinion - others may not feel the same. Good luck.

Over a decade ago, my ex-husband stated in writing as part of our divorce settlement that I was to be awarded a small monthly cash distribution from his retirement account. Payments were to start when he retired. We were married 24 years; he was/is a well-paid trade union worker in Pennsylvania, I was a stay-at-home mom raising our children for most of that time. He will be retiring soon. I did remarry a different man thirteen years ago. QUESTION: Am I still entitled to the portion of his retirement account that was in the divorce settlement? Thanks so much,

The answer is "depends". As Mike says I would go talk to an expert to get help. It really depends on the facts. Something as small as forfeitures in the future in the plan might cause problems with keeping the plan as is. On the other hand one can easily imagine a set of facts that allows you to keep the PSP and putting more money into it. It just depends on so many factors. To decide what can be done is going to take way more facts then you are giving here and most likely can be given efficiently via a forum like this. This is a good time to spend a little money for expert help in my opinion.

You make a good point (or points rather). However, I still feel a little bad for the small business owner who gets hit with a big required contribution when its due to poor plan design and bad communication from a "service provider".

Top heavy is not a punishment. It is part of the price to be paid for the tax benefits of having a plan that successfully creates a significant retirement balance for for the company's key people.

If it's 3%, I'm assuming you didn't actually mean "match"?

Given the fact that ADP excesses are taxable in the year of distribution now, rather than in the olden days where they might be taxable in the previous year, I don't see why anyone gets uppity about failed ADP tests. To me, with a failed test, you are guaranteeing the economic engines of your firm are putting away, to the penny, the maximum allowed given what the staff is contributing.

On slide 99 of ASPPA's Advance Top Heavy Testing and Plan Design Techniques presented by Bill Grossman, it says that there is no known correction of rescinding or returning the key employees deferrals so that a Top Heavy allocation will not be required. The presentation can be found here. Slide 99 in on page 50. http://benefitslink.com/boards/index.php?app=core&module=attach&section=attach&attach_id=1148

curiosity- just what was the top-heavy ratio at the end of last year? let's say the ratio was 61%, and if the company had made a profit sharing contribution of 1% to all employees last year the ratio would have been only 59%, so not top heavy. at the 2002 ASPPA Conference Q and A 49 Receivable Contribution and Top Heavy Determination? Is a discretionary profit sharing contribution for the prior plan year that is deposited after the end of the prior plan year included in the top heavy determination for the current plan year? Let’s say we have a calendar year plan, effective several years ago. We are determining the plan's top heavy percentage for the 2002 plan year. The determination date is therefore 12/31/01. The employer makes a contribution in February, 2002, which is allocated and deducted as of 12/31/01. There is a question as to whether this contribution is included in the top heavy determination for the 2002 plan year. The question relates to Q&A T-24 of the 416 regulations, which says that if a plan is not subject to 412, then the account balances are not “adjusted” to reflect a contribution made after the determination date. A. The key phrase here is “account balance”. The participants’ account balances, as of (say) 12/31/01, include the profit sharing contribution that is allocated and deducted for the 12/31/01 plan year end. So the guidance regarding “adjustments” does not apply to the receivable profit sharing contribution; it is already part of the participants’ account balances. The following is my analysis: The question as to what contributions are considered due on the determination date is determined under §1.416-1, Q&A T-24, which says that it “is generally the amount of any contributions actually made after the valuation date but on or before the determination date”. It then goes on to say that any amounts due under §412 are considered due, even if not made by the determination date. One could take the position that this is a exclusive statement; in other words, if a contribution is NOT due under 412 and is made after the determination date, it is not considered 'due'. However, the answer to the question (T-24), “How is the present value of an accrued benefit determined in a defined contribution plan” is answered, “the sum of (a) the account balance as of the most recent valuation date occurring within a 12-month period ending on the determination date, and (b) an adjustment for contributions...” The term, "the account balance" includes contributions credited to the account of a participant, it does NOT mean only the contributions actually made that have been credited. For example, if a 100% vested participant terminated after the determination date but before the contribution was actually made, the distribution would include that contribution, even though it had not yet been made to the plan. This is because the account balance, as of the last day of the plan year, includes the contribution. So, when the regulation addresses adjusting the account balance for contributions made after the determination date, we must start with the account balance, and then apply the adjustments. Since the account balance includes the receivable profit sharing contribution, the adjustment does not refer to the receivable. The reference to §412 in §1.416-1 is with regard to a waived funding deficiency that is not considered part a the participants' “account balance”, as the term is defined. Q&A T-24 refers to a DC plan with a waived funding deficiency that is being amortized. Such a plan must maintain an “adjusted account balance” (reflecting the amount of the contribution that has not been deposited) which must be maintained until the actual account balance increases to the point where it equals the “adjusted account balance”. It is to this (unadjusted) account balance that the (waived) contribution must be added, since the amortized contribution only becomes a part of the actual account balance as it is paid to the plan. The requirement therefore has the effect of determining top heavy status as though the contribution required under 412 had actually been made. In other words, the “account balance” would not include the waived minimum funding contribution, so an adjustment is required. IRS response: We accept this analysis. a reminder that such response do not necessarily reflect an accrual Treasury position. but if valid, then it is possible a contribution for the prior year might be less than a 3% top heavy this year. since we are still before 9/15 it might be possible....

More important than fairness, is understanding why it happened and how to prevent it. This type of surprise is completely preventable. This type of situation should have been considered when the plan was created, and it should have been designed to either avoid it altogether or at a minimum make it very clear to the sponsor what they can and can't do in order to avoid a "surprise". Obviously, service providers can only do so much, and sometimes the client completely disregards what they have been told. In any event, it will never be a surprise if there is proper planning from day one. At this point, you contribute what you need to contribute due to top-heavy minimums and you sit down and re-design the plan to prevent this from happening in the future.

No Leg, it is not allowable. I'm sure it has been done, though....

I think he's doing it wrong but the income is sum of the two.

So, everyone is right!