Terminated Db And Top Heavy After Egtrra

[mwyatt]

A little confused here about taking into account a terminated DB plan for top heavy testing purposes after 2001. From looking at the new Code 416, we have a decrease in the look-back time from 5 to 1 year period ending on Determination Date.

(3) Distributions during last year before determination date taken into account.

(A) In general. For purposes of determining—

(i) the present value of the cumulative accrued benefit for any employee, or

(ii) the amount of the account of any employee,

such present value or amount shall be increased by the aggregate distributions made with respect to such employee under the plan during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which if it had not been terminated would have been required to be included in an aggregation group.

(B) 5-year period in case of in-service distribution. In the case of any distribution made for a reason other than separation from service, death, or disability, subparagraph (A) shall be applied by substituting “5-year period” for “1-year period”.

However, when I look at (B) immediately above, would you deem distributions to currently active participants as falling under "in-service distributions" (hence you keep around for 5 years, but delete out distributions to terminated participants falling out of the 1 year window), or do all distributions disappear for testing purposes after 1 year?

Thanks for any help, insight here. I'm leaning to keeping active participant distributions for testing purposes around for 5 years, but maybe I'm reading this wrong.

[Guest merlin]

Every practitioner I know equates plan termination with termination of employment as far as the addback period is concerned. But according to Sal Tripodi in the ERISA Outline Book, the IRS is of the opinion that plan termination = in-service. But I've not seen anything more formal than that.

[mwyatt]

Thanks Merlin for the reply. Would be nice to get a definitive answer from the IRS on this issue as it certainly could have a real bearing on the continuing plan's status. Consider a DB that terminates that is clearly top-heavy, and a successor 401(k) that is clearly not top-heavy on it's own, but if you add back distributions from the DB plan to actives would be overwhelmingly top-heavy. Obviously this could be a real problem in years in which a 3% contribution is not received in the 2-5 year period by non-keys if one group is saying that it isn't top heavy, while the louder voice of the IRS is saying that it is top heavy.

[mwyatt]

Actually, reposted this question to TAG, and their opinion is that for active employees, the terminated plan distributions would fall under the 5-year, rather than the 1-year, rule, "despite what the Code says". So buyer beware out there, at least until we get further clarification of this point from the IRS.

[Mike Preston]

Merlin wrote: "Every practitioner I know equates plan termination with termination of employment as far as the addback period is concerned. "

Really? The Code seems pretty clear to me that an inservice distribution is kept around for 5 years. How is a distribution to an active employee not an inservice distribution?

[Guest merlin]

Mike,

I said they regard it that way, which of course doesn't necessarily make it right. But I think that a rational argument can be made that plan terminations are a special animal, separate and apart from in-service distributions. For one thing, isd are available only under fairly limited circumstances and have to be specifically allowed by the plan doc. A plan termination can take place at any time and has always been a distributable event, equivalent to termination of employment. Given mwyatt's question and Tripodi's opinin (2003 ERISA Outline Book,pp 1.533 and 1.547) you have to admit that it's at least open open to discussion. Or do you?

[mwyatt]

As an aside, I'd like to point out that our intrepid Leader (Dave) managed to fix the smilie problem (originally, my reference to (B) came out like ( . Feel free to post Code cites without looking like a dimwit...

[Mike Preston]

Oh, I don't know. Obviously, the citation uses the term in-service distribution and then doesn't define it anywhere. Certainly, in-service distributions are prohibited in certain plans and plan termination distributions are an exception to that general definition. But that is the best argument I can make. Without a citation I think it is a stretch to therefore claim that a distribution to an active employee pursuant to a plan termination is NOT an inservice distribution, but the fact is that I'd like to find a more definitive cite, one way or the other.

[Guest merlin]

Per Jim Holland at the Mid Atlantic Benefits Conference yesterday, plan terminations are not in-service distributions. However, they are not on account of separation from service, and thus are subject to the 5-year lookback.

[Mike Preston]

Thanks, merlin. We have some confirmation that Sal's understanding of the IRS position is correct.

[KJohnson]

We almost got the opposite response out of Holland yesterday and I couldn't believe it...then he went back and reread the question and corrected himself...oh well...

[mwyatt]

Merlin, thanks for your help on this issue. The code reference I originally cited to start this whole thing out was pretty ambiguous on this point.