Our Plan is top heavy - HELP

[Guest BJW]

Our plan had the 401(k) discrimination testing completed for 12/31/00 and they stated that we are top heavy - the percentage was over 60% by a small amount. May we have one of our NHCE roll over her money into the Plan to avoid being top heavy for this year or is it too late? Will this rollover work for next year?

[R. Butler]

I assume by rollover you mean the NHCE has a balance in another qualified plan that he will transfer to this plan. Genarlly rollover contributions are not considered in determining top heavy status. If this is a related rollover (either not initiated by the employee or made to a qualified plan maintained by the same or a related employer) it would be considered in the top heavy test at 12/31/01.

Assuming the test done correctly at 12/31/00, you are probably stuck in 2001

[actuarysmith]

I concur with the previous response. Neither can you "roll out" a balance from a Key employee to water-down the top heavy ratio.

Maybe you should consider not having any Key employees defer this year (may be too late), or maybe you should look at a QNEC.

Have you considered a safe harbor 401(k)?

[david rigby]

Well, if a top-heavy test is very close to 60%, you might consider whether a closer inspection is in order, especially with respect to the 5-year lookback. Remember that a T-H percent rarely changes much from one year to the next. If it is not close, you don't have to spend much effort with fine-tuning. But detail can be important if your test is close, to make sure you caught all applicable payments in the past five years. Also, if you have former EEs who have been gone for 5 years and have NOT been paid out, then the account balance should not be included in the T-H test.

[Guest]

also verify what contributions were used in the top heavy test. generally a profit sharing contribution made after the end of the plan year is not (or should not be) included.

[Guest James Osterhaus]

Tom

Why wouldn't a profit sharing contribution made after the end of the year be counted in the top-heavy test. If your doing a top-heavy test at the end of 2000 and the employer makes a PS contribution for the 2000 plan year on February 1st, I would think those amounts would be applied in 2000 for the test. Is there somewhere in the regs I can find this?

James

[david rigby]

This is a pretty subtle point. See Q&A T-24.

BTW, don't forget Q&A T-28.

An earlier discussion might be useful:

http://benefitslink.com/boards/index.php?showtopic=7605

[Tom Poje]

I suppose it will be interesting to see how the new regs effect a plan status. remember you are losing 4 years of prior distributions that might have prevented a plan from being top heavy. I can think of one plan I process that might have an ugly surprise coming up.

I know the new regs are plan years begining in 2002. Now, does that mean to determine if I have to issue top heavy in 2002 I use the new rules or does that mean I use the new rules for the first time by looking at 12/31/02 and determining if my plan is top heavy for 2003?

[R. Butler]

Just a guess, but I believe we use the new rules to determine top heavy status for 2002. §613(f) of the act says it "applies" to years beginning after December 31, 2001.

What is really neat about this whole act is that it "sunsets" at 2010. If Congress doesn't do something between now and 2010, then in 2011 everything will revert back to today's rules.

[david rigby]

What is really neat about this whole act is that it "sunsets" at 2010.

Don't count on it. This is a very public statement by Congress to encourage lobbying in future years, so that later legislation can "correct" or "fine-tune" any problems in current law.

[Guest MES]

It actually sunsets in 2010 because it was part of a budget reconciliation act, and as such could only be effective for 10 years, without an override by 60% of the Senate. They didn't have the votes. Although it does make for interesting analysis.