Do you physically have to do a Top Heavy test?

[Brian Gallagher]

Do you actually have to perform a top heavy test each year? For example, before we do a Profit Sharing calaculation for a client, we need to know if the plan is top heavy or not. My client said, "Oh no, we're not top heavy." I asked if she did one, she said she hasn't done one "in a while."

What are the consequences of not documenting a TH test each year. The plan is obviously not top heavy--one key ee, bal $150,000, non-keys, $2.1MM, but there is nothing actually showing the calculations.

(We did get something in writing staitng the plan isn't TH)

[jquazza]

This is actually a test you don't have to perform as long as you can reasonably (mathematically) demonstrate that your plan is or isn't top heavy (see treas. reg. 1.416-T39).

That means you don't have to actually calculate an exact ratio, but you have to be able to prove that you are (or not) top heavy using reasonable assumptions. For example, since no one has been tracking in-service distributions for the past 5 years, you could safely assume that all five-year distributions for key employees were in-service, and for non keys, they were termination distributions; your assumption will not produce an exact TH ratio, but will be a "worst case scenario." If your ratio is at or below 60%, you can safely assume the plan isn't TH.