Top heavy - include correctives?

[Guest RONNIE WASEL]

Working with a plan that has had no testing since 1997. When calculating the top heavy test each year how would we treat the corrective distributions for the ADP/ACP that should have been made.

Since the test is "cash basis" it appears that these would have no effect.

In other words, the key employee's cash basis balance as of the determination date would be the number we base the ratio on, plus any distributions they made in the 5 years previous.

Thanks,

Ronnie Wasel

[jaemmons]

Corrective distributions are not to be included for top heavy determination. Therefore, if they had been included in their balance in the prior years, you need to back them out and rerun for correct top heavy concentration %'s.

[Tom Poje]

no one knows 100% for sure how to handle corrective distributions.

The ERISA Outline book (and I think this is what I learned years ago) is if the amount is treated as ana nnual addition, then include it in the top heavy test. Therefore, corrective distributions for failed tests would be included.

Excess deferrals (amounts over the 11,000 limit) that are returned would not be included.

with the advent of EGTRRA I am not sure if the above argument is entirely valid.

Consider the rules on catch up contributions.

They are included in determining whether the plan is top heavy.

One reason for exercising a catch-up is a failed test. If you do, then you include the amount in the test. On the other hand, if you return the $ then you .....(from EGTRRA)

"In the case of in-service distribution made for a reason other than separation from service, death, or disability you keep track of the amounts for 5 years rather 1 year"

since the distribution is not for separation of service, etc, then it looks like you should track for 5 years.

But what about excess deferrals? The same logic could be applied.

so, I guess I would lean toward including the amounts because of the combination of the catch-up rules and EGTRRA.

Hopefully those amounts would not be critical in determining top-heavy or not.

but heck, we are still not clear on if a safe harbor 401(k) plan is exempt from the top heavy rules if it merely offers a profit sharing feature. Maybe the IRS will answer all these questions at once.

[jaemmons]

Tom,

My understanding of an in-service distribution is that it does not include corrective distributions due to failed ADP/ACP or 415 tests. My reasoning is that these are benefits which are being returned because they cannot remain in the tax-exempt trust of the plan. The HCE is not initiating a distribution of qualified benefits during his/her employment, so I don't see how these are counted in with other in-service payments (i.e.-hardship, age 59 1/2, etc.).

EGTRRA obviously helps with potentially eliminating the need to return $'s, but these amounts are now being "reclassified" so they can stay in the plan. I would agree that catchup $'s should be counted when determining top heavy. I may be in little company but I have always trained my administrators to ignore all corrective distributions for top heavy determination.

[Tom Poje]

I'm not disagreeing or agreeing with your comments, it is just from what I have read no one knows for sure.

T-30 of 416 simply says

"For purposes of this question and answer, distributions means all distributions made by the plan."

according to that there are no exceptions.

or as someone once said to me

just what part of 'all' don't you understand?

My present mental state would have a hard time not including match amounts that were returned to the (key) employee. It would be like saying, it is a good thing you failed the test, otherwise you would be top heavy. In addition, you got a distribution out of the plan for nothing, whereas normally you would have to wait until retirement. This should happen more often. such a deal!

[Guest Judy S]

Tom-you say that the ERISA Outline Book, whose views I generally use, says that distributions treated as annual additions are included in the top heavy test. Excess deferrals that are not distributed by 4/15 are included as annual additions-does that mean that you would include them?. . . that you would only exclude them when distributed by the 4/15 deadline?

[Tom Poje]

Judy-

that is the way I would read it.

I try to remember it this way:

Corrective distributions are due to a failed test. In other words, basically there was nothing wrong with the contribution itself, it was just that the test failed.

Excess deferrals couldn't be made in the first place so it doesn't make sense to include them at all. I'm really not sure why the 4/15 date should make a difference, but I am not a big one for going against anything Sal (ERISA Outline book) says. He has usually researched the stuff in depth. then again, even that book says it is unclear.