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"cite"! They are cites. Not sites.

But we are often looking for sites with cites.

Sorry, I'm here! The problem you've got is that there is no program similar to EPCRS for nongovernmental 457(b)s.So you really can't get an answer, until and unless there is an audit. The amount should have been reported on the W-2 in 2009. However, given that both the statute of limitations will have passed on both the employer and the employee, I don't know that you need to do anything about that now. One question is whether you now pay him only the amount that should have been paid in 2009, or some kind of earnings since then. Payment of the earnings could generate a new reporting obligation. As for the plan, in theory the IRS could go after it, but I doubt it would. It's not like a plan with a trust fund, in which tax benefits have been accruing to the plan all these years (due to untaxed earnings on account balances). In the case of a nongovernmental 457(b), the plan for each employee is more or less self-contained. (The tax consequences of one plan for each employee, or one plan for the whole group, would be identical.) So it wouldn't make sense to remove the tax benefits to current employees due to something that happened to a different employee back in 2009.

Most of my clients are small businesses. We generally tell them that if their plan is NOT top heavy, they are doing something wrong. Of course, we also encourage them to go safe harbor so that it's a mute point.

Not in all instances. A high percentage may cause a failure. When you consider that the actual distributions begin with the individuals who deferred the most dollars; it may make sense to keep the percentages lowered in "some" instances. But, you do make a good point. Good Luck

Actually, "punishment" is partially correct, but also misleading. TH rules can affect small plans that are exactly identical to large plans, except for the relative number of Key EEs. Is that a logical reason to impose stronger N-D tests? A little analysis of the history of non-discrimination rules will make it clear that TH was created long before the 401a4 rules. If we had a little common sense in Washington, they would review all the N-D rules taken together, and find ways to simplify. However, those of use who have been around know that anything that goes in with the label of "simplification" comes out with the description of "complification".

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.

From the EOB, "If the participant has an outstanding loan at the time of death, the participant's death will usually result in an offset of the unpaid balance against the accrued benefit. The participant (or the participant's estate), not the beneficiary, will be liable for any taxes resulting from that offset, because the beneficiary is not a party to the loan agreement. The tax liability might be reported on the participant's final income tax return or on the estate's income tax return." Above from EOB Chapter 7, Section XIV Part I It also references Treas. Reg. Section 1.72(p)-1 for taxation of loan offsets. I also found that 72(t)(2)(A)(ii) provides an exception to the early withdrawal penalty for distributions made to a beneficiary (or to the estate of the employee) on or after the death of the employee. Hope this helps!