Top-heavy corrections

[Guest lc]

After an internal audit of a 401(k) plan, it was discovered that in 1997 a top-heavy corrective contribution was made in error (the plan was not top-heavy), and in 1999 a top-heavy contribution which was necessary was made but it was less than what it should have been. Any suggestions as to how to correct?

[rcline46]

For 1997, the employer made a fully deductible contribution to the plan of 3%. Not a problem, not 'correctible' since no error was made legally.

1999 is short on T/H. Make the contribution and allocate it based on 1999 figures.

Of course, the T/H determination for 1997 was based on the 12/31/96 account balances, and for 1999 was based on the 12/31/98 account balances correctly, including payouts for the 96 (or 98) and 4 preceding years, right?

[Guest]

1997 might still be a problem. If you had an employee who worked less than 1000 hours and only received a contribution because of top heavy, then he was not entitled to that contribution. I would assume the correction would be to take the $ away and reallocate to others. I would assume the amount to be small, one person, sounds insignificant, although a reallocation involves all people, so not sure if that is considered SCP or not.

You did not indicate if vesting was an issue as well...e.g if plan had 3/20 schedule but used a 2/20.

[david rigby]

I wonder if the 1997 contribution was deductible.

[Richard Anderson]

If the 97 TH allocation went only to Non-Key employees, then the contribution would either need to be reallocated according to the plan document (including Keys) or an additional corrective contribution should be made for the key employees.