Top Heavy Determination

[Guest kgsingletary]

This question is brought up from the IRS Q&A at the 2002 ASPA Conference...Question #49

What account balances are used in determining the top heavy status of a DC (non-pension) plan? More specifically - do you include receivable contributions (Top Heavy Minimum Contribution allocated to Non-Key EEs only)?

Example:

1st plan year of a 401(k) only plan. Plan year 1/1/00 - 12/31/00. The Key "Cash" account balances are more than 60% of the total plan balances at 12/31/00. Therefore, the plan is TH for 2000. The plan allocates a 3% minimum contribution to the Non-Key employees.

In determining the top heavy status for 2001 - do I include or exlcude the 3% minimum top heavy contribution (allocated to Non-Key ees only)?

**Same question only it's not the first plan year...Do I include or exclude the receivable?

In my research I found (ERISA Outline Books and various other locations)...in the first plan year you include ER Discretionary receivables - but only for the first plan year. However, I'm interpreting the IRS response to say different.

Thanks for your help!

[R. Butler]

See this prior thread.

http://benefitslink.com/boards/index.php?showtopic=16950

[Tom Poje]

yes, the IRS is different than what we probably have been taught. Or at least I assume most never learned to include profit sharing receivable.

remember, it is from a Q and A, and does not necessarily represent an 'official' position of the IRS. On the other hand, who am I to argue with the points they made.

[Guest kgsingletary]

I sent an email to the IRS requesting further clarification and guidance regarding the Top Heavy question presented at the ASPA conference. The agent (Mr. Leslie) that called back was in attendance and expressed the same opinions communicated at the conference. He said that in any year (not just the first plan year) receivable contributions allocated/credited to the participants are included in the account balance used for determining the Top Heavy percentage.

Please let me know if you can think of any other specific Top Heavy questions to ask as I still have his phone number and he said I could call back with more questions.

[Tom Poje]

I suppose the obvious question would be

'since most of us (or at least it seems to be the case) were taught not to include the receivable are you going to worry about what was done in the past?'

Probably in most cases it doesn't make a difference anyway, but I am sure there were some plans close to the 60% level...or the old days 90% for super top heavy with a DC involved and a but back.

by the way, thanks for the additional input!

[R. Butler]

Is everyone all of the sudden going to include the receivable? I know you a few agents have indicated that you should, but there isn't any formal guidance. This kind of concerns me no matter which method I choose.

[pmacduff]

Just to put in my 2 cents, I've been doing pension administration since 1990 and I was taught to include the receivable contribution as it is allocated on the last day of the plan year and is reflected in the participant's 12/31 balance. I was alittle concerned after all these years to see that from what Tom says, the "majority" of administrators have not included receivables. What a relief to see, (albiet verbally), that Mr. Leslie reiterated what I had been taught.................... I will continue to include receivables as I have done going on 13 years.................!

[Guest kgsingletary]

Sorry I abbreviated my 1st post too much...

I went on to ask why this has never come up before - his response was that if the question is not asked the IRS does not provide opinion or guidance. This was the first time apparently that someone asked for guidance on this issue.

I asked what happens now if a plan is audited and it is found the Top Heavy was tested on a cash rather than accrued basis. He said the agent would ask us to redo the test including the receivable contributon and if the plan was found to be Top Heavy a TH minimum would be due. I did not ask what additional tax or penalty would apply.

I will call back and ask if "Official Guidance/Opinion" can or will be published and what the IRS would expect of us who have been testing TH on a cash basis all these years.

Thanks for your input...

[austin3515]

I'm almost positive I read in both the ERISA Outline Book and the 401(k) Answer Book that receivables are excluded for non-pensions except in the first year.

Can both of the "Bibles" be wrong? My world will shatter if they are!

[Tom Poje]

of course, now the question, what does your software do?

I have a gut feeling a lot of people simply run things and the 'system must be doing it correctly'. not that some numbers are checked/verified, but...

my suspicions would be most software would simply look at whatever the end balance was use that, hence a cash basis, unless you printed the report before running the final contribution.

The old Pentabs system would include the contribution, but also carried a caveat that it shouldn't be included in their monthly memo. (I suppose that is one place where I learned not include it)

A few years ago at an ASPA talk the speaker said to include it if it had been declared before the end of the plan year (or use it if it was a top-heavy contribution because it was required)

Relius might include it - there is a field in plan specs 'include if trade date on or before xx/xx/xxxx.' So, if you are running things on a non-daily basis generally it is no problem because your 'trade date' will be the last day of the plan year. (whether you intended to operate it that way or not) on the other hand if you are running daily....

Again, I would suspect that this whole issue would probably only effect a small number of plans - and probably favor the NHCEs - e.g. a top heavy was made when it didn't have to made.

Austin is correct. even the ERISA Outline book says to not include the receivable.

[Guest kgsingletary]

I agree that the Pension Answer Book and the ERISA Outline Books are the "Written Word". I've read and studied them both many times over.

However, when my plan is being audited - is the auditor going say - oh you read that in the PAB your method must be correct or are they going to say - sorry that's not the law and here is how the test should be done?

I would prefer to test on a cash basis as that is how I and most everyone I know have done the test. In addition, I don't want to call up my borderline Top Heavy clients and say I missinterpreted the regulations - you did not have to make that Top Heavy minimum contribution last year.

Many issues here - just looking for a little guidance - which the powers that be don't seem to want to give...

Mr. Leslie returned my phone call from 01/03/03...This is the voice mail he left...

{There is no plan to issue written guidance regarding this issue...Q&As are given to people here at IRS who have the authority to answer those questions and they give the answers. The people who talked at the conference...Jim Holland and Dick Wickersham...Jim is in charge or rulings & agreements and Dick is in charge of guidance for employee plans. They probably at least reviewed the Q&A at the conference and then answered the questions there. As far as if the right people have looked at the issue and given the answer...I think they have.}

What more does anyone else need to know before changing their testing method? Is this enough? Is this a judgement call for each TPA to make? Is this something ASPA would get involved with? Was ASPA allowed to ask a follow-up question or make the statement that all of the reference materials indicate the Top Heavy is standarly tested on a cash basis?

Sorry - things like this drive me crazy - when there is no right answer...or when there is a right answer but no one likes it so they just ignore it...

Opinions and ideas appreciated!

Thanks for allowing me to vent!

[austin3515]

Let's call Sal Tripodi!

Anyone have his number?

[R. Butler]

I don't see this as Sal Tripodi vs. Dick Wickersham. §1.416-1,T-24 pretty much says that you don't include the receivable unless it is the first plan year or the plan is subject to minimum funding standards.

My follow up question to Wickersham, Leslie, etc. would be if receiveables in a profit sharing plan are to be included in the top heavy determination, then in §1.416-1, T-24, what dictinction is the IRS trying to make between those plans subject to 412 and those that are not and also between first year plans and nonfirst year plans? The reg. clearly distinguishes between these plan situations.

I've thought about this and I know that we won't change until there is formal, written guidance that changes §1.416-1,T-24.

[austin3515]

I'm just curious to hear Sal's thoughts on the matter. Heck he probably golfs with those guys!

[Mike Preston]

I am with R. Butler on this one. I think the logic in the written Q&A was very difficult to follow. I also think that the response wasn't that one MUST include the receivable, only that doing so, based on the logic presented, was reasonable. It does not follow that excluding the receivable is unreasonable.

It looks like one can do it either way. The best of both worlds.

Now, if we could just get them to say that in writing......

Until then, though, the language of the regulation seems unambigous to me. And if I'm asked by a client, I have to tell them that NOT including the receivable in any year other than the first seems to be the only way to be faithful to the regulation.

[Guest kgsingletary]

I want to thank everyone who expressed their views and opinions on this issue. I emailed Sal Tripodi (via the CyberERISA website) and here is the response I received...

"First, I would not consider this a technical question that requires an account.

Second, I am aware of the position. Also, the IRS spokespersons did a lot of back-pedaling, so that it became apparent that although some at IRS believe the accrual rule applies, they wouldn't challenge use of the cash rule. They practically admitted that they wouldn't even audit the plan's calculation of the accounts, so they wouldn't know whether the plan was using the cash method or the accrual method.

Third, I don't think the IRS is right. If they are, then the regulation is meaningless. They wouldn't need all that language about adding in contributions made after the close of the first plan year, and the stuff about plans subject to 412.

Fourth, references to the IRS' discussion at the Q&A session are incorporated into the 2003 Edition of The ERISA Outline Book.

Sal Tripodi "

I am going to continue on with testing Top Heavy on a cash basis.

Thanks again!

[austin3515]

Nuff said...

I was half kidding about asking Sal!

[Tom Poje]

c'mon Austin. I still am curious about T-24

where it says to include contributions

'made after the valuation date but on or before the determination date'

if, by definition, the determination date is the last day of the preceding plan year, how do I make a contribution after the valuation date but before the determination date?

[Richard Anderson]

Tom,

I don't think the valuation date has to be the last day of the plan year.

PYE = 12/31

Annual valuation date = 6/30

In such a case, a contribution deposited after 6/30, but before 12/31, will be a contribution deposited after the valuation date, but, before the determination date. Such a contribution is included in account for TH determination.

[Tom Poje]

I agree you can have more than one val date, e.g. if you process things quarterly you would have 4 val dates, but eventually you have a val date = last day of plan year.

Corbel's has "Anniversary Date (=last day of plan year) and may include any other date or dates..."

New England protoype has ".. provided such designation includes the last day of each plan year as the valuation date"

so I still wonder how a contribution can be made after the val date but before the determination date. that seems nonsensical, but maybe I am missing something (besides a few screws)