Top Heavy Question

[wsp]

Silly question, but...

Client has plan that has recently become top heavy. 75% owner has 50% of account balance and is in process of transferring ownership and control to children. Owner is 70 1/2 and taking RMD's. If owner terminates, and no longer receives compensation, would his distribution still be considered an inservice distribution for purposes of top heavy distribution add backs simply due to his ownership status? 5 year look back versus 1 year.

Client is currently making more in top heavy contributions than his COBRA payments for health insurance would be.

And if it's considered a full distribution, what happens if (hypothetically) he rehires after a 1 year break in service?

Other option is to take it Safe Harbor beginning 1/1/2007 and ending profit sharing contributions. In which case plan gets amended to use forfeitures only to offset fees. But, if we are trying to maximize contributions for children we would need to use a super match formula. I know those extra matching contributions do not remove the safe harbor label, but do they get considered safe harbor contributions for top heavy purposes? They do not mind making the extra matching for staff, they just don't like making the contribution for "otherwise excludables" many of whom terminate before becoming eligible.

[ERISAnut]

The 5 year in-service distribution rule is participant driven. This means that you would consider the inservice distribution for only those participants who are includable in the Top Heavy Test. If this owner terminates employment more then 1 year prior to the Top Heavy Determination Date, then his balance and his previous distributions would be excluded from the analysis.

The termination and re-employment routine would not fly. Too much work just a save a 3% contribution to employees anyway.

[wsp]

The 5 year in-service distribution rule is participant driven. This means that you would consider the inservice distribution for only those participants who are includable in the Top Heavy Test. If this owner terminates employment more then 1 year prior to the Top Heavy Determination Date, then his balance and his previous distributions would be excluded from the analysis.

The termination and re-employment routine would not fly. Too much work just a save a 3% contribution to employees anyway.

At this point owner is only employed as a consultant and to receive healthcare benefits. And, unfortunately, it's not a 3% contribution. Company allows participation in 401k after 3 months of service and Company also typically contributes 15% to staff in an integrated formula. To pass discrim tests the Top Heavy has to be higher than that. This year it was 1/2 of the p/s percentage (they've yet to decide) In terms of real dollars, Top Heavy contribtution ends up being higher than COBRA payments for 2 years. And, 3% is material depending upon census isn't it? Could be very material in comparison to actual contribution in high turnover years.

[ERISAnut]

Do not confuse the 416 requirements with 401(a)(4).

The Top Heavy rules are under 416 while the non-discrimination rules are in 401(a)(4).

You seem to be using top-heavy in the wrong context.

[wsp]

Do not confuse the 416 requirements with 401(a)(4).

The Top Heavy rules are under 416 while the non-discrimination rules are in 401(a)(4).

You seem to be using top-heavy in the wrong context.

Absolutely correct, wasn't thinking when I wrote that. But as this is a construction firm with an old school owner, they do not want to pay a dime if they don't have to. So, he likely would terminate if his premiums for health insurance were less than the top heavy contributions. I know that he will ask about it anyways.

What we are likely looking at is a termination of employment and he simply gets insurance via his spouse who remains on the company payroll. See anything wrong with that? He's still 5% owner and obviously so is she...but that shouldn't matter. Correct?