Top Heavy testing w/rollovers

[Belgarath]

I have a question regarding treatment of rollovers when doing top heavy testing. Now that EGTRRA permits greater portability, I'm not positive about the treatment of rollovers from certain plans as to whether they should be included as "related" or not. Assume you have a PS plan, and consider whether rollovers into that PS plan from each plan type below, maintained by the same employer should be included. Would appreciate any opinions.

1. A SEP. I would say yes, based upon 416(i)(6).

2. SIMPLES. I'm not positive on these. I would say no, but I can't find any definitive statutory treatment. Since I can't find any statutory or regulatory language similar to 416(i) for SEPS, (nor under 408(p)) I'd assume no.

3. 403(b). I'm a litle confused by this. I believe that if there are EMPLOYER contributions, as opposed to deferrals only, that the employer contribution portion would be included in the required aggregation group under 416(g), and therefore a rollover from this portion would be included. But deferral portions would not. This is moot on a personal level, since we never have plans where the same or related employer maintains a 403(b), but I'd still like to know the answer.

4. 457's. No.

Appreciate your thoughts!

[mbozek]

Sicne 403(b) plans are not subject to the TH rules I dont see how there would be any aggregation of this plan with qualified plans for TH purposes.

[Appleby]

I doubt SIMPLEs and SEPs would be considered “related” Belgarath. Remember the determination of “related” applies only if the transaction is employer initiated… for SIMPLEs and SEPs, the rollover will always be employee initiated and therefore “unrelated”, even if both plans are maintained by the same employer.

mbozek’s point about the 403(b) assets seems to make sense as well and I would alos apply it to 457 assets. IMO, “related” applies only to qualified plans assets …not IRA based plans, 403(b) plans or 457 plans.

[Belgarath]

Thank you both for the responses. After considering it further, I certainly agree with Mbozek's comment re the 403(b)'s. But Appleby, could you take a look at 1.416-1, T-32, for the discussion of related vs nonrelated rollovers? It appears to me that the be nonrelated, it must meet a two-pronged test. It must be BOTH initiated by the employee, AND made from a plan maintained by ANOTHER employer. And therefore, I think, since the SEP's appear to be treated as DC plans under 416(i)(6)(A), if maintained by the same employer, then I would think it would count as related. After looking at these, is your opinion still the same? I want to make sure I get this right, as this is a situation that is actually likely to occur at some point. Right now, I feel reasonably comfortable with my conclusion, but I've been wrong before! Thanks again.

[Appleby]

Belgarath,

I can’t seem to find anything that specifically addresses SEPs with respect to related VS nonrelated. I did review the cite you provide but I am still not convinced that it includes SEPs for the reason I stated earlier, i.e. the employee, never the employer, may initiate a distribution or transfer of assets from a SEP IRA. …also, remember that for a SEP IRA, only contributions made for the year are taken into consideration when determining top heavy status [iRC § 416(i)(6)(B)] . As you know, for qualified plans, it is account balances that is used. Wouldn’t including amounts rolled over from a SEP contradict IRC § 416(i)(6)(B)

In many instances, 1.416-1 refers to mergers and transfers. These two types of transactions can occur only between two qualified plans, never between a SEP and a qualified plan. OK I know, I am stretching here but…

[Belgarath]

Appleby - thanks for the response. I think we'll agree to disagree on this one. I still read the definition of "unrelated" transfer to require that it be transferred to a plan of another employer. As for IRC § 416(i)(6)(B), this is an election, and not mandatory. But even if the employer makes this election, I don't think it carries over to the new plan. Once rolled out of the SEP, it loses its SEP characteristics. At least, that's how I would interpret it. Even if you take the stance that the rollover amount retains those previous SEP characteristics for top heavy testing, at the very least, you'd have to include aggregate employer contributions. So the only way to avoid including at LEAST the employer contribution portion of the rollover would be to hang your hat on it being an "unrelated" transfer. Which I don't think it is. But I do greatly appreciate your comments - I find it very helpful to look at these questions from another perspective. Ciao.

[R. Butler]

I agree with you Belgrath, the rollover of the SEP would be related because it is a transfer to a Plan of the same employer, but can you get around that? Will the SEP be terminating? Couldn't you rollover the SEP money to a traditional IRA & then roll that conduit IRA into the Plan? It may aggressive, but I don't know of anything that specifically prevents it.

[Belgarath]

That's a clever idea! I never thought of that. And I agree, I don't see why it wouldn't work. It seems ridiculous to have to take this approach, in that it gets you back to the same place as what Appleby originally suggested, it just takes an extra step. But it seems to me that this is required by the code/regs, which often elevate form over substance. Thanks for the idea.