Top Heavy Determination

[RPP2001]

If a plan fails its ADP test but recharacterizes some of the deferrrals for an HCE, can those recharacterized amounts be disregarded for top heavy purposes? It appears based on my initial research that you can disregard "catch-ups" for top heavy purposes, but only for the plan year in which they are made. I need to verify that "catch-ups" in this case can be disregarded even though the amounts weren't over the 402(g) limit - they were just recharacterized due to a failing ADP test.

[Guest Sieve]

Catch-up contributions are ignored for purposes of determining whether, in the current year, minimum top heavy contributions are required. For example, if the key employe with the largest deferral of 2% had a catch-up contribution putting that key employee over the 3% allocatin level, the catch-up would be disregarded in determining the minimum required contribution in a top heavy plan to non-key employees. But, the catch-up will not be ignored in determining the account balances as of the end of any prior year for purposes of determining whether the plan is top heavy in the first place. (See Treas. Reg. Section 1.401(v)-1(d)(3)(i).)

So, if in 2008 there was an ADP correction that caused a 2007 deferral to be treated as a catch-up contribution, that 2007 catch-up (whether characterized as a deferral or as a catch-up) still was in the plan as of 12/31/2007 (assume a calendar year plan) and still would be used in determining whether the plan was top heavy in 2008.

[RPP2001]

Thank you for that distinction. To add to my original post, I have a plan that was effective 1/1/07 which failed the ADP test and $10,000 is being recharacterized as catch-ups between 2 HCEs (who are also key EEs) for 2007. Is this $10,000 included in the account balances on the 12/31/07 determination date for the 2007 top heavy ratio? If so, since this is a new plan, is that top heavy ratio used to determine the 2008 top heavy status?

[Guest Sieve]

I think you can ignore the catch-ups for determining 2007 top heavy status, but not for determining 2008 top heavy status. The difference is that for 2007 the catch-ups relate to the current year, but for 2008 they relate to the prior year.

The reg. (Treas. Reg. Section 1.414(v)-1(d)(3)(i)) very clearly talks about ignoring catch-up contributions "with respect to the current year" and then, in the last sentence's example, says that "catch-up contributions for prior years" are included in determining top heavy status. The reg could have said that all contributions are counted for determining top heavy status, not just those made for prior years, which then would have captured the initial year's top heavy determination--but the reg was not worded that way, so I think it should be interpreted as worded.

There is no prior year to look at when determining a plan's first year top heavy status, so catch-up contributions in that top heavy determination do not relate to a prior year. So, those contributions should be ignored when determining top heavy status. But, those same catch-up contributions should be considered when looking back to 2007 to determine top heavy status for 2008. At least, that's my take on how it would work.

[buckaroo]

This is an interesting post. I think I am about to learn something new, but I want to be sure I fully understand. Under your scenario, the CUC for the recalssifed ADP refunds for the year being tested would always be included in the top heavy determination. Do I have this correct? In your example, it appears that the ADP refunds are reclassified as CUC in 2008. You are saying that they do not count for the 2007 TH determination, but they do for 2008? So for the 2009 TH determination, any ADP refunds reclassified for the 2008 PY (in 2009) would be counted in the top heavy determination as of 12/31/2008? It also means that this will continue to be the same way for every year?

I always thought that because you were determining TH status as of the last day of the prior plan year, any CUC attributable to the plan year containing the TH determination date (regardless of reason for reclassification) were excluded. In my thought process, you could not provide an accurate TH test until you had completed the all testing which could cause a reclassification of deferrals to CUC.

Also, in your scenario, what about 415? If the 415 test is not run until after the EOY, I would think that it would also be included. Correct?

Sorry if this rambling, but I have a lot of questions and little typing skills

[Guest Sieve]

RPP stated that the plan was NEW in 2007, which means that, under TH regs, 12/31/2007 account balances determine top heavy status for both 2007 & 2008. I simply suggested, in that very specific scenario, that catch-ups maybe ought not count for the 2007 TH determination (since the reg says include catch-up contributions in TH determination for prior years, and 2007 is not a prior year for 2007 TH). But, they certainly would count as of 12/31/2007 for 2008 TH determiantion (since, in that case, the regualr rules apply, and you deetermine 2008 TH based on 2007 account balances).

I was not suggesting that the timing of the determination of failed ADP corrections as catch-ups had any bearing whatsoever on TH determination, because I don't think it matters at all. Whether or not it's an elective deferral or a catch-up, it still counts for a normal TH determination (looking back a year)--but, in a plan's first year, there's no look-back.