top heavy 401(k) first plan year

[Guest Mike Kimball]

12/31/98 is the first plan year end of a 401(k) plan. Based on the account balances at 12/31 the plan is top heavy, but plan failed ADP test and some HCEs (also were keys) took back refunds of deferrals on 3/15/99. If the refunded deferrals are deducted from the account balance in the top heavy test, the plan is not top heavy. It sounds logical to reduce the account balances by the refunded deferrals, but I can't find a specific reference saying it is OK. Any thoughts on this???

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[M R Bernardin]

I believe an IRS official indicated at an ASPA conference that refunds could not be excluded, so that you would still have a top heavy plan. There may also be some guidance in the top heavy examination guidelines.

[Guest]

I heard a similar view at a NIPA conference. If the funds are in the plan on the anniversary date, they must be included in the plan balance for top heavy testing purposes.

[david rigby]

the refunds are distributions from the plan. the T-H test is performed using the 12/31/98 balances.

[Richard Anderson]

The distributions will need to be added to the account balances for the next 4 years, also.

If the plan has contributions other than deferrals (PS or match), then any contributions allocated for the first plan year must be included in the account balance used for top heavy testing. This includes contributions required by the document and any discretionary contributions that are allocated in the first plan year.

After the first plan year accrued contributions are included in the account balance for top heavy calculations only if they are required by the plan document. Also, if a Board resolution to contribute a discretionary contribution is made befor the end of the plan year, then that contribution must be included for top heavy testing.