Top heavy test / related employer

[Guest JB2]

Two key employees from company A leave and start company B, in which they are 50/50 owners. A & B are not common ownership.

Company B establishes plan, and they roll their funds from A's plans into it. Rolled funds are substantial and represent 96% of B's balances.

For top-heavy test, are the rollover funds considered related to B's plan or are they tested under A's plan? I only ask this as the individuals were key employees in both companys.

[Guest rshawlaw]

I refer you to Reg. §1.416-1 Q&A T-12, Example 1 for the effect on Company A's plan of the termination of employment of the key employees. See also Q&A T-1(d) regarding the inclusion of distributions in the present value of accrued benefits. The individuals would be treated as key employees for purposes of determining whether the Company A plan is top-heavy for the year in which they terminated employment and for four more years. With respect to Company B's plan, the account balances of the two owners which were rolled over from the unrelated Company A's plan are ignored for purposes of determining whether Company B's plan is top-heavy. Reg. §1.416-1 Q&A T-32.

[Guest lforesz]

Hi,

You seem to be an authority. Same situation exept partners in law firm leave and start own law firm. I would assume the same would apply, the new law firm would not have to treat the rollovers as related because there was no common ownership for any period of time between the two law firms.

Are you able to confirm or reaffirm?

And, I suppose the answer would change if the lawyers were not given the choice to take a distribution or roll somewhere else. In that case, the rollover would not have been initiated by the employee, and the amounts would be related. The lawyers are saying they didn't have a choice- they had to roll. What consultant would advise that when they know the balances would then be related? Just scratchig my head. Any help is greatly appreciated!