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I'm a little confused if the distribution is still in his individual account didn't he get the gain/(loss) by the funds remaining in his account? Or were the funds liquidated but he never got the check which may or may not have been sent to him? If it's the former then I don't see that he has much of a claim, if it's the later the fund house is likely to simply stop payment on the original check and reissue likely without earnings.

Plan participation doesn't impact that determination.

Here is an analysis of Top Heavy plans done by the GAO in 2000 that provides explores the pros, cons, and practical considerations surrounding top heavy rules. On balance, the rules are accomplishing the goal of having owners who derive substantial tax benefits from their company needing to provide a level of access to retirement income on behalf of the company's employees. The trend in recent legislation has been to provide more lower cost avenues for owners to do so. From a technical standpoint, the Top-Heavy Innoculation Exclusion sounds plausible. From practical standpoint, it is a disaster that is waiting to happen. The greatest risk is operational compliance, particularly when the people performing HR, payroll and benefits functions at the company are making daily decisions about who is in or out of the plan. The Exclusion does not have a plausible corrective action in the event of an operational failure other than to make the top heavy contribution. IMHO, we can play knight-errant and tilt at windmills, but it is our clients that suffer the consequences when facts and circumstances result in this approach fails to live up to its guarantee. “Top-Heavy” Rules for Owner Dominated Plans.pdf

This is not an argument against you Austin...... just still trying to wrap my head around the plan. You have 2 milliion in compensation for Non-Keys and let's guess 3 Keys....(or let's say it's 8 Keys, don't matter) You are rightfully concerned the plan will go TH in 3 years or quicker..... it appears the Keys are deferring to pass ADP and the Non-Keys are lackluster causing concern. IMO the employer needs to bake in 3 to 4% from somewhere and go safe harbor. Based on the scenario, the business is making money. Unlock the deferral limits with safe harbor and make this more normal than abnormal. You're working too hard for a plan that wants to limit the Key deferrals. And why bother having a plan if non-Keys are sucking the life out of the plan and the Employer is not willing to go safe harbor? And then the Keys can't defer 3 out of 5 years..... no thanks. Or I'm missing something of big importance....

Not all self employed, only sole proprietors. And it was not IRS, it was Congress, in SECURE 2.0.

Yes, that's exactly what I'm trying to confirm. In other deals, we have had employees contribute to the B SIMPLE IRA from their A compensation (and have set up a manual process in which the SIMPLE deferrals are withheld from A compensation and contributed to the SIMPLE IRA). Section 408(p)(10) provides that the only way an employer (meaning the entire controlled group) is permitted to maintain both a SIMPLE IRA and a 401k plan is if "the qualified salary reduction arrangement maintained by the employer would satisfy the requirements of this subsection after the transaction if the employer which maintained the arrangement before the transaction remained a separate employer." It's clear that if the seller continues as a sub and the employees continue their employment with seller post-close, seller would be required to have employees continue their deferrals. I guess it's not so clear, at least to me, that if the seller's employees come over to the buyer's payroll in connection with the transaction whether salary reduction contributions must continue to 12/31. Is this a grey area or am I being overly conservative?

If the plan document allows for such (or is amended for such).

Yes, it's allowed but I think it must be done (plan adopted and deferrals made) by the unextended tax return due date. I believe that's the rule, someone will correct me if I'm wrong. Here is an article stating such. I don't usually rely on Ascensus for technical issues but this agrees with my understanding. https://www.ascensus.com/industry-regulatory-news/news-articles/retroactive-first-year-elective-deferrals-for-sole-proprietors/

None. This is intended for the small employer, where the owner makes say $80K a year wants to save what they can in 401k and provide a payroll deduction contribution opportunity for their employees. I think it's easy to forget that no one wants to be forced to right a check for tens of thousands of dollars, which is what happens to the "victims" in these scenarios. It's hard to overstate what this means to real people who suffer the consequences of this dastardly rule. If I can make sure that NEVER happens to them, I have done a substantial public service. You almost got to hear my soap box speech at how cruel these rules are, particularly because of who they do target (small closely held businesses) and who they do not (Microsoft and IBM and PricewatershouseCoopers and the like). I'll bet the director of HR at Microsoft does not even know what top-heavy is. That's a shame.

In general, I'm ok with this sort of exclusion, as long as it is carefully worded. Top heavy status is definitely determinable - it is based on the account values at the determination date. In theory one could know on January 1 whether the plan is top heavy for the year. In practice, it may take a little longer to run the test. If you have this language in the plan, and a Key employee contributes for the current year before it is known that the plan is top heavy, you have an operational failure, since the employee was not properly excluded. You could self-correct the failure by removing the contributions (with earnings) and refunding them to the employee. Or, instead of excluding Key employees entirely when the plan is top heavy, consider keeping them eligible, but imposing a contribution limit of $0. That would let Key employees who are over age 50 make a contribution which would be immediately reclassified as catch-up, due to exceeding a plan-imposed limit. Catch-up contributions for the current year are excluded from top heavy, so this would allow them to make a contribution without triggering the top heavy minimum. Paul's point about non-HCE Keys is a good one, and interesting. For a long time it would have been very unusual to see any non-HCE Keys, unless you had a top-paid group election and your officers and/or 1% owners were not among the highest paid employees. Now, however the HCE compensation threshold has risen higher than the compensation threshold for a 1% owner to be a Key employee* so I suspect we will start seeing this situation more and more in future years. If you had a non-HCE Key who was prevented from making deferrals due to this language, that's not necessarily a problem, but you would have to keep an eye on your coverage test and nondiscrimination tests for availability of BRFs. * The $150,000 dollar limit was in section 416 when it was added by TEFRA in 1982 and has not been adjusted ever. One inflation calculator I found online tells me that $150,000 in September 1982 is worth over $475,000 today.

Assuming he's 100% vested (same really applies if less), then typically he would get 100% of whatever was in the account when it was liquidated and sent. So he did get earnings whenever it was processed. And I don't believe that the brokerage firm wasn't able to see what the participant was invested in at the time. Not that it really matters, but they're saying they can't run a report from X date to liquidation? Please.

The Top Heavy determination is based on account balances. Account balances grow not only from receiving contributions but also from reallocation of forfeitures and from investment income. Account balances for non-Key Employees shrink from decreases due to distributions, in-service withdrawals, forfeitures and also from investment losses. High turnover among non-Key Employees and longevity among Key Employees can work together to increase the percent of total plan assets in the accounts of Key Employees. Then there are some pesky compliance rules. Key Employees are not necessarily Highly Compensated Employees. This can have an impact of various compliance tests depending upon the test and upon the plan's allocation formulas. Generally, declaring a contribution ineligible after it is made to the plan is like trying to un-ring the bell. Some have tried and failed to succeed with an argument that contributions made by Key Employees were a mistake of fact. Now, if all of the Key Employees are in fact Highly Compensated Employees, you may get a little bit of traction with the concept by focusing on restrictions on the HCEs, but the odds of this working year-over-year are not very good. There are unforeseen circumstances that can work against the strategy like variances in compensation due to terminations early in the year or hires late in the year, changes in ownership, changes in job responsibilities, and other similar facts and circumstances. Never say never. Be sure to explain everything to the client before selling them on this idea.

With the caveat that this will be a transaction-specific determination on a number of issues, a few off-the-cuff thoughts: I assume A and B are not affiliated pre-JV. I would double-check the stock exclusion, attribution, affiliated service group, and management services group rules to make completely sure they are not affiliated post-JV. It wouldn't surprise me if they formed an ASG post-JV. Assuming A and B are not affiliated at any time, pre-JV or post-JV, then I think B's employees moving to A are, for purposes of A's 401(k) plan, new hires who can participate in the 401(k) plan right away (assuming eligibility and entry dates are satisfied). If that's the case, I agree they will have a separation from service with B. The former B employees' post-closing 401(k) deferrals will be capped taking into account their pre-JV SIMPLE deferrals; they don't get to fully double up. Whoever maintains the SIMPLE will need to make sure all deferrals and employer contributions are funded for all periods during which B's employees worked for B (i.e., pre-JV). If B's employees are no longer employed by B post-JV, there would not be any obligation to continue making SIMPLE deferrals or employer contributions on the basis of those employees' post-JV pay from A. If all of B's employees are terminated, functionally the SIMPLE IRA ends. But, technically, I don't think the SIMPLE IRA can terminate until 12/31. Terminating a SIMPLE IRA doesn't have much significance, so usually this is a non-issue. Remember the two-year rollover limitation for SIMPLE IRAs before everyone tries to roll over their SIMPLE IRA to A's 401(k).

No

Yes, I agree. For purposes of the POP component of the Section 125 cafeteria plan, eligibility should be tied to each particular component within the health and welfare plan for which employees contribute on a pre-tax basis. That way if dental/vision has different eligibility standards than medical (e.g., they don't rely on the look-back measurement method's measurement/stability periods), employees' eligibility to pay for such benefits pre-tax through the cafeteria plan remains unaffected by a change in medical plan eligibility (or vice versa). It does make sense to tie eligibility to the health FSA component with medical plan eligibility, though. That is a requirement to preserve excepted benefit status for the health FSA (the so-called "footprint rule" that anyone eligible for the health FSA must also be eligible for the major medical). So there are situations where that eligibility tie specifically to the medical plan could make sense.