top heavy contributions

[Guest Christine]

The determination of whether a plan is top-heavy is made as of the last day of the plan year. The contribution to nonkey employees is the lesser of 3% or the percentage contribution for key employees.

The plan had failed the ADP test and monies were returned to the key employees by March 15th. For purposes of determining the top heavy contribution for nonkey employees, do we use the actual numbers that were in the plan on the last day, or the amount that should have been (i.e., after the distribution of excess contributions in March)? Obviously, if we use the latter, the percentage will be lower but the lower percentage reflects the true benefit to the key employee for the plan year.

[Tom Poje]

actually the true benefit was what the key ee contributed, followed by a distribution.

...top heavy % = contributions + forfeitures allocated to a key employee.

to correct a failed test, you have a distribution, not a 'negative' contribution.

(if key ee is also sharing in the contribution to satisfy top heavy, it becomes a moot point, as his contribution will increase)

[Guest JB2]

A key employee terminates employment to start his own own company. The new company is not associated with the former employer.

He establishes a 401k plan and rolls his funds from the previous employers DB plan to the 401k.

Will this rollover be treated as related and therefore must be included in the top heavy test? If Yes, would it make a difference if he was not a key employee in the other company?