Top Heavy?

[Guest TrustMe401k]

New 401(k) Plan established 1/1/2000. Plan fails ADP in '00. Correction method was a QNEC. Prior to contribuition of QNEC, plan was Top-Heavy. Plan made QNEC and 3% top-heavy contribution to those not eligible for QNEC. After QNEC and '00 top-heavy contribution, top-heavy % drops to 47%.

Question: Do you determine top-heavy status before or after the QNEC was made? Is Plan top-heavy for 2001?

(This is a plan a colleague is taking over so I don't have many more details)

All responses are greatly appreciated!

[Tom Poje]

at the 1998 ASPA conference, I attended workshop 44, which was on top-heavy.

and from the notes I have the following:

'generally, only contributions made on or before the determination date are included.

however if the contribution obligation is created on or before the determination date, such accrued contribution is generally included in the account balance.

and there is a refernece to Rev Rul ---------

unfortunately of the 87 footnotes from the talk, this was the one item that was left blank. I even wrote to the presenter, and even he doesn't remember the exact rev rul.

based on that, I would say the plan kicks out of being top-heavy.

[Mike Preston]

The plan may not have been top-heavy for 2000. Generally, in the first year of a plan, the determination date is the last day of the plan year. In the first year of the plan, there is an exception to the general rule that one only counts contributions made before the determination date. See 1.416-1-Q&A T-24.

In this case, for 2000, if you counted just the QNEC, would the plan have been top-heavy? If not, then I think the 3% contribution to those not eiligible for QNEC may not have been required. And, in fact, may have been misallocated.

Since the determination date for the second year is genearlly the same date as the determination date for the second year, I would think that if the plan wasn't top-heavy for 2001, it isn't top-heavy for 2002.

However, EGTRRA sayd that you determine key employees differently so there may be a difference. Usually, though, it will work such that if a plan is top-heavy in 2001, then it has a chance of not being top-heavy in 2002.

[Guest bogart126]

according to Sal Tripodi's ERISA OUTLINE BOOK, contributions made after the close of the first plan year are included in the top heavy ratio for the first determination date. therefore, in your example you would be able to include the QNEC and TH contribution made for 2000 to determine if 2001 is TH. at 47% 2001 would not be TH.