Top Heavy Minimum Contribution

[Guest kgsingletary]

The 401(k) (deferral only) plan is not top heavy for the plan year ending 12/31/01. However, is top heavy for the 12/31/02 plan year end.

A top heavy minimum contribution of the lesser of 3% or highest allocation to Key EEs is required for the 2002 plan year.

Ok, here's the complicated part...

The ADP test is tested using prior year (nhce %) basis. In 2001 the NHCE ADP was 0%. Therefore, for 2002 the HCEs (which happens to be the only Key EEs) ADP should be 0%. Thereby, making the Top Heavy Minimum Contribution to NonKey EEs 0%.

The problem is that the HCEs (Keys) have been deferring all year (2002) and will require an ADP refund.

Do I have to take the ADP refund contribution into consideration when determining the Allocation received by Key EEs? OR can I say (after making refund) the Key EEs received $0 allocation?

[Archimage]

Why not amend to use current year testing? Also, was the 401(k) not available in 2001? If that is the case, then you could use the first year election of 3% for the NHCEs.

[Blinky the 3-eyed Fish]

Archimage brings up some good points. But in the event that corrective distributions still need to be made, the excess contributions still count as annual additions and a top heavy contribution would need to be made.

One other thought, can the excess contributions be recharacterized as catch-up contributions or are the HCE affected not age 50 in 2002?

[Mike Preston]

In answer to the question asked: yes, deferrals count towards establishing the 3% th minimum even if refunded. Further, they count as distributions during the period when returned when calculating the top-heavy ratio. Truly a double whammy.