John A

IRS regulation 1.401(m)-1(f)(12)(iii) says, in part, "For plan years beginning after December 31, 1988, a contribution or allocation that is used to meet the minimum contribution or benefit requirement of section 416 is not treated as made on account of an employee or elective contribution and therefore is not a matching contribution." This led me to believe that any "matching contribution" could not be used to satisfy top-heavy since any contribution used to satisfy top-heavy would, by definition, not be a matching contribution. However, 1.416-1 M19 Q&A states, in part, "if a plan uses contributions allocated to employees other than key employees on the basis of employee contributions or elective contributions to satisfy the minimum contribution requirement, these contributions are not treated as matching contributions for purposes of applying the requirements of sections 401(k) and 401(m) for plan years beginning after December 31, 1988. Thus these contributions must meet the nondiscrimination requirements of section 401(a)(4) without regard to section 401(m)." This seems to imply that it is possible to use the match (or a portion of it) to satisfy the top heavy requirement, but any match used to satisfy top heavy cannot be used in the ACP test. Therefore, any match used to satisfy top-heavy must be tested under the general test to make sure the match used for top heavy is non-discriminatory. Since the top heavy contribution is usually given only to non-key employees, it will generally pass the general test, but often causes a problem with the ACP test. Is anyone aware of any additional guidance on this issue?

I have heard that top-heavy contributions should be made by 12 months after the end of the plan year, on the basis that that is when other contributions not subject to 412 are due. Of course, the deduction timing rules of 404 still apply.

What are the coverage requirements for an employer-contribution only, nonelecting, 403(B) church defined contribution plan? Is it possible to exclude groups of employees (pre-school employees paid from the church's payroll, bookstore employees paid from the church's payroll, part-time employees, etc.) from getting a contribution while all other employees get a uniform percent (like 5%) of compensation?

Thanks, klc, I appreciate your input. Just to follow up on some additional issues if the Employer decides to revalue: Would all participants need to be notified that the plan was revalued? Should the employer have some type of written policy drafted about why the decision was made to revalue and/or under what circumstances they might revalue in the future? Could the participant be charged for any or all of the costs associated with the revaluation? By the way, the problem with the argument about the participant benefitting in other years is that this participant is hurt much more in the current year than he was helped in prior years since his balance is such a large percentage of plan assets. Thanks again for your input.

Thanks, Tom. I appreciate the answer. However, if the employer decides to revalue anyway (despite being advised against it), what steps do you think should be taken? Would all participants need to be notified that the plan had been revalued? Should the employer have some type of written policy drafted about why the decision was made to revalue and/or under what circumstances they might revalue in the future? Could the participant actually be charged for any or all of the costs associated with the revaluation? How could the Employer best protect themselves against nondiscrimination issues?

A defined contribution plan defines Valuation Date as "the last day of the Plan Year or such other date as agreed to by the Employer and the Trustee on which Participant accounts are revalued ...". The Employer has always paid distributions based on the last day of the preceding plan year. A participant with a very large balance (much larger than most other participants) is threatening to sue the Employer if the Employer does not revalue his account shortly before making his distribution. What are other TPA's advising their clients in this situation? Is anyone aware of actual court cases similar to this? (Note: I posted this same question on the Retirement Plans in General message board - I wasn't sure which place was more appropriate).

A defined contribution plan defines Valuation Date as "the last day of the Plan Year or such other date as agreed to by the Employer and the Trustee on which Participant accounts are revalued ...". The Employer has always paid distributions using the value as of the last day of the preceding plan year. A participant with a substantially larger balance than most terminated in 1998 and is threatening to sue the Employer if the Employer does not revalue the account shortly before making the distribution. What have other TPA's advised their clients in this situation? Is anyone aware of actual court cases similar to this situation?

jehmig, please check IRS Code Section 7503 and Federal Tax Regulation 301.7503-1.

While it isn't crystal clear, IRS Publication 509 October 1998 Tax Calendars for 1999, would seem to imply that the due date for calendar year 5500s is August 2, 1999, not July 31.

What is the correction when an ineligible employee of a single-employer with a 401(k) profit sharing plan is allowed to make 401(k)contributions and receives matching contributions? What must happen to the deferrals, interest on the deferrals, matchin contributions, and interest on the match? Can an IRS self-correction program be used? If so, which one? Can any money be returned as "mistake of fact" if the plan has the proper language? What would constitute a "mistake of fact"? When would the one-year period start? Would any of the answers change based on how long the ineligible employee had been allowed to make 401(k) contributions and get the match (3 months vs. 2 years)?