Top heavy balance question, what do you include?

[Guest Enda80]

Picky, but important question regarding top heavy, as there is no allowance for a deminimis amount. Namely, is only money that is actually in a participant's account at the determination date included for the balance considered (for a plan in operation more than one year as of 12/31/06, the determination date would be 12/31/05)? After all, not often does would a taxpayer have made his or her contribution for the 2005 plan year actually before 12/31/2005, usually they would make it a few months later (but still before the income tax return is due).

Second question, somewhat less important; does the phrase "termination process" only refer to when employees are dismissed without their consent, or if they voluntarily leave, does this still count as part of the termination process? There would still be paperwork involved.

[J Simmons]

As to your first question, Treas Reg sec 1.416-1:

T-24 Q. How is the present value of an accrued benefit determined in a defined contribution plan?

A. The present value of accrued benefits as of the determination date for any individual is 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 due as of the determination date. In the case of a plan not subject to the minimum funding requirements of section 412, the adjustment in (b) is generally the amount of any contributions actually made after the valuation date but on or before the determination date. However, in the first plan year of the plan, the adjustment in (b) should also reflect the amount of any contributions made after the determination date that are allocated as of a date in that first plan year. In the case of a plan that is subject to the minimum funding requirements, the account balance in (a) should include contributions that would be allocated as of a date not later than the determination date, even though those amounts are not yet required to be contributed. Thus, the account balance will include contributions waived in prior years as reflected in the adjusted account balance and contributions not paid that resulted in a funding deficiency. The adjusted account balance is described in Rev. Rul. 78-223, 1978-1 C.B. 125. Also, the adjustment in (b) should reflect the amount of any contribution actually made (or due to be made) after the valuation date but before the expiration of the extended payment period in section 412©(10).

[Mike Preston]

Enda, without poisoning the well, based on what was posted above, how do think the answer to your first question should be worded?

[Guest Enda80]

As to your first question, Treas Reg sec 1.416-1:

T-24 Q. How is the present value of an accrued benefit determined in a defined contribution plan?

A. The present value of accrued benefits as of the determination date for any individual is 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 due as of the determination date. In the case of a plan not subject to the minimum funding requirements of section 412, the adjustment in (b) is generally the amount of any contributions actually made after the valuation date but on or before the determination date. However, in the first plan year of the plan, the adjustment in (b) should also reflect the amount of any contributions made after the determination date that are allocated as of a date in that first plan year. In the case of a plan that is subject to the minimum funding requirements, the account balance in (a) should include contributions that would be allocated as of a date not later than the determination date, even though those amounts are not yet required to be contributed. Thus, the account balance will include contributions waived in prior years as reflected in the adjusted account balance and contributions not paid that resulted in a funding deficiency. The adjusted account balance is described in Rev. Rul. 78-223, 1978-1 C.B. 125. Also, the adjustment in (b) should reflect the amount of any contribution actually made (or due to be made) after the valuation date but before the expiration of the extended payment period in section 412©(10).

"In the case of a plan that is subject to the minimum funding requirements, the account balance in (a) should include contributions that would be allocated as of a date not later than the determination date, even though those amounts are not yet required to be contributed. "

Ah, I see that a key point here is the distinction between allocation and contribution. Allocation is simply the process of the mathematical calculation of who gets what, contribution is actually putting the money in.

Well, that certainly save me quite a bit of research. In my hypothetical situation (remember, it was just a hypothetical situation), the contributions were made (i.e. actually put into the account, actually showing up on the asset statements) after the determination date. Also, it was not a money purchase plan, so it was not subject to the 412 minimum funding strictures.

However, that line "b) an adjustment for contributions due as of the determination date[/u]" leads me to wonder; does it mean contributions due to be paid on or before the determination date, or the emergence of an obligation to make a contribution to a participant's account due to said employee's having managed to work till the determination date (which, of course, would be the last day of the plan year)?

[Mike Preston]

You didn't answer my question, did you?

[Bird]

The IRS clarified a few years ago that the adjustment referenced for receivables generally does NOT apply to profit sharing plans; i.e. you include the full receivable. I can't remember now if they said it was optional, or someone interpreted it as optional, but, at least the way we run our plans, it would be messy at best to do it otherwise. I think it was an ASPPA Q&A, and I'm quite sure there is at least one prior thread on it.

(Whatever Mike is getting at is over my head.)

[Mike Preston]

No, you've hit the nail on the head, but you have now done what I didn't want to do, which is to ask the OP to interpret the language/guidance as it exists to see what a person who has little familiarity with the process thinks the answer should be based solely on reading the written word. Alas, since that isn't possible anymore, I'll just end with saying that I think the written word is clear that it is inappropriate to include receivables and that the IRS has some contorted logic that revolves around the definition of "account balance" to allow them to render the language which says you don't include receivables to mean that you do include them.

I'd love to see a court case because I think a judge would castigate the IRS for such a tortured interpretation.

Nonetheless, it is clear that there are some people at the IRS who think you should include receivables in a PS/401(k) type plan and therefore if you choose not to, at least be aware of those folks.

[Guest dbvail]

I won't be so presumpsuous as to tangle with Mike. However, logistically, systems like Relius will include the recievable IF WE KNOW the number when the final valuation is run. The Top Heavy test will therefore have that number in it. Linguistics aside, this will result in an accrual type of accounting that will include the dreaded recievable. Systems that are transactional only (cash basis) can't have this nuance. ADP and Paychex through Ascecia (Bysis) come to mind.

Any thoughts?

[Tom Poje]

in Relius there is a plan spec item for top heavy "include contributions with trade date on or before", the default is 1/7 for calendar year plans, I guess assuming the last of the year deferrals are given a week for deposit, so it all depends on how you run the software.you run

[Guest M. Martin]

I apologize in advance if I am dredging up an old previously answered topic; however, I have searched the topic threads concerning the treatment of catch-up contributions and found conflicting responses.

Most, if not all, testing software include catch-ups since these amounts fall into the same source bucket as regular 401(k) contributions. It is clear that a catch-up cannot trigger a top heavy required minimum contribution but wondered, if it were permissible, about the effect of excluding the current year catch-ups for a plan that was borderline in their top heavy percentage.

Can current year catch-up contributions be excluded from the end of year balances for purposes of determining the top heavy percentage? For example, all 2007 catch-up contributions excluded from the 12-31-07 balances for the TH determination for the 2008 plan year. Or, since the current year TH test for 2008 is based on the balances from the prior year all catch-ups are considered prior year contributions and therefore included?

§1.414(v)-1. Catch-up contributions

(3) Contributions not taken into account for other nondiscrimination purposes

(i) Application for top-heavy. --Catch-up contributions with respect to the current plan year are not taken into account for purposes of section 416. However, catch-up contributions for prior years are taken into account for purposes of section 416. Thus, catch-up contributions for prior years are included in the account balances that are used in determining whether the plan is top-heavy under section 416(g).

[Mike Preston]

"Can current year catch-up contributions be excluded from the end of year balances for purposes of determining the top heavy percentage?"

How much wood could a woodchuck chuck if a woodchuck could chuck wood?

I don't know, because the woodchuck can't.

And since current year contributions are NEVER used in the determination of the top heavy percentage, you can, of course, answer the above question in the affirmative.

But you must include them in the following year when looking at the account balance as of the end of the prior year.

Did I misinterpret your question?

[Guest M. Martin]

Something like that... see if this is clearer…

Assuming 401(k) Plan total balances as of 12-31-07 determination date are as follows (no distributions, no former employees):

If current year catch-ups made during in 2007 could be excluded:

KEY EMPLOYEES

Total 12/31/07 Balance = 850,000.00

Minus 12/31/07 Rollover balances = 160,000.00

Minus catch-up contributions made during 2007 = 25,000.00

12/31/07 Top Heavy Balances = 665,000.00

NON-KEY EES

Total 12/31/07 Balance = 450,000.00

Minus 12/31/07 Rollover balances = 0.00

Minus catch-up contributions made during 2007 = 5,000.00

12/31/07 Top Heavy Balances = 445,000.00

PLAN TOTALS

Total 12/31/07 Balance = 1,300,000.00

Minus 12/31/07 Rollover balances = 160,000.00

Minus catch-up contributions made during 2007 = 25,000.00

12/31/07 Top Heavy Balances = 1,110,000.00 *

Top Heavy Percentage for 2008 = 59.91%

*Includes catch-up contributions from prior years (2006, 2005, etc.)

Including catch-ups made during 2007:

KEY EMPLOYEES

Total 12/31/07 Balance = 850,000.00

Minus 12/31/07 Rollover balances = 160,000.00

Minus catch-up contributions made during 2007 = - n/a -

12/31/07 Top Heavy Balances = 690,000.00

NON-KEY EES

Total 12/31/07 Balance = 450,000.00

Minus 12/31/07 Rollover balances = 0.00

Minus catch-up contributions made during 2007 = - n/a -

12/31/07 Top Heavy Balances = 450,000.00

PLAN TOTALS

Total 12/31/07 Balance = 1,300,000.00

Minus 12/31/07 Rollover balances = 160,000.00

Minus catch-up contributions made during 2007 = - n/a -

12/31/07 Top Heavy Balances = 1,140,000.00 *

Top Heavy Percentage for 2008 = 60.53%

*Includes catch-up contributions from all years (2007, 2006, 2005, etc.)

[Mike Preston]

I think that "Thus, catch-up contributions for prior years are included in the account balances that are used in determining whether the plan is top-heavy under section 416(g)." makes it clear that the plan in question has a TH percentage for 2008 of more than 60%. This particular woodchuck can't chuck wood.