Top Heavy Cutback Issue

[Christine Roberts]

I have read somewhere that timing your good faith EGTRRA amendment may raise cutback issues with regard to top-heavy contributions, if the amendment allowing use of matching contributions to satisfy top-heavy rules takes effect prior to the last day of the 2002 plan year.

Can anyone clarify?

[Bob R]

For d/c plans it's not an issue because participants in a d/c plan aren't entitled to top-heavy minimums unless employed at the end of the year. So, you'd have until the end of the 2002 plan year to adopt the EGTRRA amendment w/out there being an imperissible cut-back.

[MGB]

What about safe harbor plans that will now use the match to satisfy the top-heavy contribution?

I think this would be a cutback if not amended before 2002.

[KJohnson]

MGB I don't see this as an "early amendment issue. They are getting their match without regard to what you do for top-heavy. The only time they could "accrue" the match plus the 3% is as the end of the year. So if you amend before the last day of the Plan Year have you cut back anything that they have "accrued"? (Of course if you have a plan with deferrals and a safe harbor match alone, you don't even have to worry about top heavy).

I think one issue that has been raised is the change in compensation. Assume a standardized prototype profit sharing plan with a discretionary contribution so someone "accrues" an allocation of any contribution made at 500 hours and the plan specifically caps comp at $170,000. Then if you amend to incorporate the $200,000 after the "accrual" under the $170,000 formula, aren't you "cutting back" a benefit for those who earn less than $170,000 because those who earn more than $170,000 will be getting a greater allocation of the contribution for the year?