Top Heavy Plan

[Gary]

This post was submitted to the 401k plans and retirement plans boards with no response, thus the reason for the post on the spirited DB plans board.

An employer sponsors a defined contribution plan.

It began as a money purchase plan and then was converted to a profit sharing plan with a 401k feature.

For the past few years it has been a 401k plan with a discretionary match. There have been no matches since 2004.

The employer was informed that the plan has been top heavy for many years, but the employer/sponsor has not made TH contributions.

The employer is now considering terminating this plan, making distributions and not making TH contributions for prior years.

It seems to me that this plan can be disqualified upon audit, due to not meeting the TH contribution requirements and thus all employer tax deductions can be retroactively disallowed.

Any other views?

If the plan were terminated say 3/31/08, with distributions made by 5/31/08 and a final return filed by say 12/31/08 would the statute of limitations be three years from 12/31/08 and thus if the plan were not audited prior to 12/31/2011 then the IRS could not disqualify the plan retroactively?Thanks.

[ak2ary]

I havent done a 5500 in a long long time, but wasnt there a question on whether the plan was top heavy on that form. If that question was not truthfully answered, I believe there is an arguement that the statute on those returns never started running

[Jim Norman]

The employer should discuss this with counsel under attorney client privilege. There is more at stake than just the 5500 statute of limitations. Since the plan is not qualified, distributions are not eligible for rollover. Participants who roll over might be hit with taxes, premature distribution penalties and excess IRA contribution penalties should the problem be discovered and the employer unable/unwilling to correct. The need to quantify and evaluate the scope of the problem and the trade offs involved before making this decision.