Receivables in Top Heavy test?

[BG5150]

Do you include receivables in the Top heavy test?

[david rigby]

There may be prior discussion to help you.

For example, http://benefitslink.com/boards/index.php?showtopic=29365

[Dan]

Generally, the receivables are included only if a defined contribution plan has minimum funding standards. So receivables to a money purchase plan or a profit sharing plan where the contribution is required would be included.

Receivables from discretionary contributions are not included in the Top Heavy test.

[Bird]

Generally, the receivables are included only if a defined contribution plan has minimum funding standards. So receivables to a money purchase plan or a profit sharing plan where the contribution is required would be included.

Receivables from discretionary contributions are not included in the Top Heavy test.

Yeah but the IRS response in the link provided above does not make that distinction. I for one am not going to allocate PS contributions in two steps just for TH purposes.

[Kimberly S]

I'm looking at a 2002 ASPPA & IRS Q&A session transcript that clearly indicates that a contribution that has been allocated and deducted for a particular year is part of the participant's account balance regardless of when it is deposited. Is there a reason to think that has changed?

[Guest GordyK]

Dan:

Per ERISA outling page 3.267 profit sharing plans, even with required contributions are not subject to minimum funding. IRC 412(h)(1). Something new out there?

[Dan]

My initial response is that this is always how I have done Top Heavy calculations. But I don't expect anyone to take my word alone, so I will offer the sources below. They are directly on point.

From CCH:

Pension - Treatise/Analytical Materials and Tools - 401(k) Answer Book, Franz, Richardson, McDonagh, and Collister - Chapter 14 Top-Heavy Rules - Top-Heavy Testing - Present Value of Accrued Benefits -

TREATISE, 401(k)-ANSWER-BOOK, Q 14:20 How is the present value of accrued benefits determined in a defined contribution plan?

How is the present value of accrued benefits determined in a defined contribution plan?

The present value of accrued benefits as of the determination date for any individual is the participant's account balance as of that date. (Technically, the regulations provide that account balances are determined as of the most recent valuation date occurring within the 12-month period ending on the determination date. For most plans, however, the determination date, because it is the last day of a plan year, will be a valuation date.) Contributions made after the determination date but allocated as of that date are not taken into account unless either of these conditions exists: (bold emphasis mine)

1. The plan is a money purchase, target benefit, or other defined contribution plan subject to minimum funding requirements under Code Section 412; or

2. The plan is a 401(k) plan or other profit sharing or stock bonus plan, and a top-heavy determination is being made for the initial plan year.

[Treas. Reg. §1.416-1, Q&A T-24]

From The ERISA Outline Book for 2006.

See page 1.785; under section 2.a.1, he says "Pension Plans use accrual method. If the plan is a pension plan (i.e., money purchase plan or target benefit plan), contributions due as of the determination date under the minimum funding standards are included, even if not actually made by that date."

Under section 2.a.2 he says "Non-pension plans use cash method. If a plan is not a pension plan (i.e., profit sharing plan, 401(k) plan or stock bonus plan) only contributions actually made by the determination date are included. In other words, the value of the non-pension plan account is based on "cash method" of accounting."

Sal also cites Treas. Reg §1.416-1, Q&A T-24.

Kim Sheek, I never read the source you quote. As I recall, they always begin those sessions by saying the answers given are not official IRS guidance, but the opinion of the one giving the answer. If the Service genuinely has a different take, someone needs to revisit and revise Treas. Reg §1.416-1, Q&A T-24.

GordyK, I intended to include a 412(i) reference. It was obvoiusly poorly done. Thanks for the correction.

[Tom Poje]

this is the actual ASPPA Q and A from 2002

Is a discretionary profit sharing contribution for the prior plan year that is deposited after the end of the prior plan year included in the top heavy determination for the current plan year? Let’s say we have a calendar year plan, effective several years ago. We are determining the plan's top heavy percentage for the 2002 plan year. The determination date is therefore 12/31/01. The employer makes a contribution in February, 2002, which is allocated and deducted as of 12/31/01. There is a question as to whether this contribution is included in the top heavy determination for the 2002 plan year. The question relates to Q&A T-24 of the 416 regulations, which says that if a plan is not subject to 412, then the account balances are not “adjusted” to reflect a contribution made after the determination date.

A. The key phrase here is “account balance”. The participants’ account balances, as of (say) 12/31/01, include the profit sharing contribution that is allocated and deducted for the 12/31/01 plan year end. So the guidance regarding “adjustments” does not apply to the receivable profit sharing contribution; it is already part of the participants’ account balances.

The following is my analysis:

The question as to what contributions are considered due on the determination date is determined under §1.416-1, Q&A T-24, which says that it “is generally the amount of any contributions actually made after the valuation date but on or before the determination date”. It then goes on to say that any amounts due under §412 are considered due, even if not made by the determination date. One could take the position that this is a exclusive statement; in other words, if a contribution is NOT due under 412 and is made after the determination date, it is not considered 'due'. However, the answer to the question (T-24), “How is the present value of an accrued benefit determined in a defined contribution plan” is answered, “the sum of (a) the account balance as of the most recent valuation date occurring within a 12-month period ending on the determination date, and (b) an adjustment for contributions...” The term, "the account balance" includes contributions credited to the account of a participant, it does NOT mean only the contributions actually made that have been credited. For example, if a 100% vested participant terminated after the determination date but before the contribution was actually made, the distribution would include that contribution, even though it had not yet been made to the plan. This is because the account balance, as of the last day of the plan year, includes the contribution. So, when the regulation addresses adjusting the account balance for contributions made after the determination date, we must start with the account balance, and then apply the adjustments. Since the account balance includes the receivable profit sharing contribution, the adjustment does not refer to the receivable. The reference to §412 in §1.416-1 is with regard to a waived funding deficiency that is not considered part a the participants' “account balance”, as the term is defined. Q&A T-24 refers to a DC plan with a waived funding deficiency that is being amortized. Such a plan must maintain an “adjusted account balance” (reflecting the amount of the contribution that has not been deposited) which must be maintained until the actual account balance increases to the point where it equals the “adjusted account balance”. It is to this (unadjusted) account balance that the (waived) contribution must be added, since the amortized contribution only becomes a part of the actual account balance as it is paid to the plan. The requirement therefore has the effect of determining top heavy status as though the contribution required under 412 had actually been made. In other words, the “account balance” would not include the waived minimum funding contribution, so an adjustment is required.

IRS response: We accept this analysis.

[Mike Preston]

Which is complete bullox, IMO. The plain language of the regulations makes it clear that there is an expected adjustment for all plans subject to minimum funding. Not just plans that are both subject to minimum funding and have a waived funding deficiency. If that is what they meant, they should have said so. They didn't.

[AndyH]

Tom, so you submitted that question (and answer)?

So you are the one who submits legal briefs that cause the panel to not ever get to the questions that everyone else wants answered?

[Tom Poje]

actually, I remember then discussing this one from the podium a few years ago

Mike Pruett gave a talk on top heavy a few years before that, and in his notes there was a comment that for profit sharing you would include contributions declared by board of resolution (or similar) but not deposited until the following year. he even had some great footnotes. unfortunately, his site on this one was simply "rev rul "and the rest was blank. I'm not sure where I found his talk, but I did ask him about that, and he couldn't pinpoint the rev rule he had used. oh well.

[BG5150]

We accept this analysis.

Such an anticlimactic answer after a 471-word missive...