Inability to Make Top Heavy Minimum

[Guest SCUDDESLER]

My client is a small company that sponsors a safe harbor 401(k) plan which uses the 3% nonelective contribution (based on whole year comp) to satisfy the 401(k) safe harbor contribution requirement. The plan is top heavy because a number of key employees made contributions to the plan in the 2000 plan year (the plan year is the calendar year). The plan was terminated in October, 2000.

The top heavy minimum is 3% of compensation. The company does not have the funds necessary to make a 3% of compensation contribution (which would satisfy both the top heavy minimum requirement and the safe harbor 401(k) requirement). The company is on the verge of failing.

Is anyone aware of a "substantial business hardship"-type rule that would permit the company to skip making the top heavy minimum contribution? If not, could the plan refund all of the deferrals to the key employees without violating the distribution restrictions contained in Code Section 401(k)? Thanks.

[rcline46]

If the plan were terminated, then the T/H is not due (the end of year rule for top heavy). However if the elected 3% non elective and did not use the 'may' version of the notice, they still owe it as everyone is to get it.

Refunds are not an option.

They should start funding or apply to the IRS for a ruling.

[Guest SCUDDESLER]

I have heard other folks maintain that if a defined contribution plan terminates, the plan is exempt from the top heavy minimum requirement (assuming the plan is otherwise top heavy) for the year of termination. Despite the fact that some practitioners hold this view, does the IRS agree with that position? I have also heard other folks maintain the opposite in that if any key employee accrues a benefit in the year of plan termination, the sponsor cannot escape making the top heavy minimum contribution simply by terminating the plan by the 2nd to the last day of the plan year.

Is there any citable guidance from the IRS on this issue?