Top Heavy - Not!

[Ervin Barham]

401(k) Plan has 1 year eligibility for 401k & 2 year eligibility for its P/S. In 1999 the plan allocates a 3% top heavy minimum for all 1 year ee's thinking it is top heavy.

Plan discovers in 2001 that the plan was not top heavy in 1999, thus those employees should not have received that contribution.

What is the best correction method - reallocate the 1999 profit sharing to those who met the 2 year requirement and have the employer make up any losses for distributions, etc? Is there another way to put this plan back on right road that I am missing?

Thanks.

Ervin Barham

[R. Butler]

It seems to me that the end result of the error is that ineligible employees were included in the profit sharing allocation. Generally, the safe harbor correction is to retroactively amend the plan to to provide for inclusion of the ineligible employees. See Rev Proc 2001-17, Appendix B for details.