Top heavy percentage - 60.71% rounds down to 60%, so plan not top-heav

[Jean]

401(k) top-heavy test % is 60.71. The plan sponsor has decided (via CPA advice) not to make a top-heavy contribution because the ".71" can be dropped, thus resulting in a passing % of 60. CPA also stated it is up to employer to pick a method and keep it consistent year to year. Our consistent method has been to include the .71.

Can not find any reference to state this is right/wrong. Any suggestions?

[Chester]

I think that you should be including the .71, and the plan would be considered Top Heavy. I would not want to argue that you could drop the .71 to an IRS auditor if the plan were ever audited. The regs clearly state that the plan is top heavy if the ratio exceeds 60%, and 60.71% exceeds 60%, even under new math. I don't think the CPA is giving you good advice, and I for one, would not follow it.

[Tom Poje]

I would agree with above advice. There is nothing in the regs to suggest rounding. This has been argued on the PIX bulletin board as well. (PIX is pension information exchange)

When that close, it is time to verify everything -

e.g. were profit sharing contributions included in the total? Since most are made after plan year end, they should not be included. (You don't count contributions that are not required - only in year actually made)

how about previous distributions. most calculations I've seen includes distributions made over last 5 years. actually, it should be from date of termination. example - if ee quit 20 years ago, but received a distribution this year, would you include the distribution in the balance? Hopefully you haven't been counting it for 15 years, why should it magically reappear. remember, you don't count balances of people who didn't perform service for 5 years.

[Guest rshawlaw]

And remember the exception to the exception: you do count profit sharing contributions made after the end of the year if it is the first year of the plan. Reg. §1.416-1 Q&A T-24. Check out the "former key employee" definition in Reg §1.416-1 Q&A T-1 and the examples. See also Q&A T-39 for a little wiggle room.

[Jean]

Agree with all these comments and is the action that we take. What protection is there for a record keeper who has advised the employer that they are wrong with their interpretation? Does a letter from employer stating they have taken CPA advise and choose not to make a contribution protect the record keeper (realizing IRS audit will probably confirm these points)? Or would you drop this employer from your service?

[Fredman]

I concur that the ER is making a bad decision by accepting the advice of the CPA and agree that its best for you cover your tracks (to put it nicely).

I think a letter from you to the ER and possibly the CPA explaining your position would be appropriate. If you can get a letter from the ER that's even better.

As far as dropping your client, it probably depends. Have you been looking for a reason to drop the client? As long as you have your documention, the IRS should go after the ER or Trustee of the plan, not your company.

Heck, I've seen RKer's base their entire business on doing WHATEVER the client wants as long as "it was in writing".

Good Luck.

[This message has been edited by Fredman (edited 02-18-99).]

[Guest Dook]

So long as your service agreement stipulates that you are performing only ministerial functions and are not making decisions but rather act only upon authorization from the Plan Administrator or Trustee. also you should have some written correspondence documenting that have informed them that the plan is top-heavy by your calculations. They should also send you a letter indicating that they have sought counsel (albiet a CPA) and that they have determined that it is not top-heavy and no additional contribution is required. These should absolve you of any liability. I wouldn't drop them over this. Hopefully next year it will be more clear-cut as the percentage moves higher or lower.

[Guest pensiondoc]

Would agree with the above. As a general rule of thumb, mathematically anyway, anything OVER .5 is rounded UP.

[imchipbrown]

Except COLAs. The IRS always rounds down.

[Guest jamesfdavis]

Also except for Medicare Part B late enrollment surcharges. HCFA's rounding is unfathomable.

[Guest Sgalbrea]

I have got a plan that is sitting at 60.04%. Could this be rounded down so that the plan is not Top-Heavy?

[david rigby]

Looks to me like it is greater than 60%.

Whenever you are close to 60%, always check very carefully, especially with respect to prior distributions.

[Alan Simpson]

I would ask for a letter from the ER stating:

1) that you have informed them that the plan is top-heavy;

2) that you have informed them that a top-heavy contribution is due;

3) that they have been informed on the consequences of not following your advice;

4) that they are taking outside advice, indicating who that advice is from, that indicates the plan is not top-heavy;

5) that they will pay any and all of your legal bills (within 30 days of submission) associated with this transaction in the event you are brought into a legal battle over this;

6) that the guarantee of legal expense payment is binding upon the current owners and any future owners and can be collected from any one or all of the owners (from personal or corporate funds);

7) and have this letter signed by all current owners with their signatures either notarized, or signature guaranteed.

Once they realize that they may have to put up some money if the situation comes to light they may change their tune a little.

If not I would seriously consider whether to keep them as a client since they value the decision that saves them the most money more that the correct decision.

[AndyH]

I don't know of anything permitting rounding of this. I think it is top heavy. I would insist in writing that the client obtain a legal opinion on the matter as a condition of continuing to provide services. Anything else is indefensible because the decision is just plain wrong and you know (or should know) it.

If you're a member of a professional society (e.g. ASPA), it is probably also an ethical violation to ignore a faulty decision of this type which denies participants benefits they are entitled to.

[actuarysmith]

Tell the client that next time they are pulled over for speeding,they should tell the officer that they weren't really speeding - they just rounded down the number on the speedometer........................

[AndyH]

Outstanding conclusion!

If there's ever a Benefits Board Hall of Fame, I'll nominate that one!

Calling Dave Baker ......