Top-heavy Requirement?

[Guest notapensiongeek]

Calendar year top-heavy 401(k) Plan that will allocate the basic safe harbor match and a discretionary match for 2007. There will not be a profit sharing contribution for 2007, but there are profit sharing forfeitures to reallocate. Payroll ceased for all employees (keys and non-keys) in mid-September due to asset sale. Plan termination paperwork has not yet been drawn up, but will be in the near future and we will submit the plan for an fdl in 2008.

After allocating the Basic SH Match, the regular match and the PS forfeitures, we calculated that the plan sponsor would need to deposit an additional $10,000 (appx.) to satisfy what would normally be the top-heavy requirement. But since there was no payroll after mid-September, meaning no one is actually employed on 12/31/07, is the additional $10,000 deposit required? How do you handle this?

Any thoughts on this would be greatly appreciated.

Thanks!

[Jim Chad]

It sure looks to me like no one was employed on the last day of the year and therefore no one has a right to a Top Heavy contribution.

[Guest notapensiongeek]

If the client decides not to make the additional top-heavy contribution deposit, and the plan is submitted for a favorable determination letter, do you think the IRS will be ok with this? I'm wondering if anyone has had this come up before having the IRS involved.

[Tom Poje]

this is not quite your situation, but possibly may help in being prepared for how the IRS might reason the situation.

at the 2003 ASPPA Conference, Q and A #1

asked about a terminating 401k plan (pye 12/31)

Is a top heavy required (plan terminated 11/30)

the response was Yes, and, if the plan year is amended as part of the termination to a Nov 30 date, then top heavy may be determined based on comp through 11/30 rather than 12/31.

[Guest notapensiongeek]

Thanks Jim and Tom, for your responses. EOB says that, of course, making the top-heavy contribution is the conservative approach vs. the more aggressive approach of not making it.