Top heavy question

[AndyH]

Can a plan sponsor of a top heavy plan amend the plan effective in a later year to exclude certain job classifications (non-union) and avoid future top heavy accruals for such "excluded" people? Assume they had accrued benefits that had not been distributed (or account balances in a DC plan).

We have differing opinions and cannot find this addressed. I say no. Anybody disagree?

[Andy the Actuary]

yes, provided no key employee benefits. 416©(1)©(iii).

[AndyH]

yes, provided no key employee benefits. 416©(1)©(iii).

Sorry, I should have been clearer. The plan is designed for the Key employees, and the exclusions are designed to minimize employee costs. Think of it as a law firm trying to exclude currently eligible associates.

[Everett Moreland]

Many years ago I researched this and thought there was vague authority to draft a plan to provide no top-heavy accrual for a participant who moves to a class of employees who are ineligible to participate. The IRS has approved plans so drafted. I would not have the courage to amend a plan to avoid a top-heavy accrual for a current participant by excluding a class of currently eligible employees, except as a proposed amendment conditioned on IRS approval or maybe where the exclusion is for some other substantial reason. This is addressed (unsatisfactorily) in Q&A 15 of the 2000 ASPPA IRS Q&As, which is available here:

http://www.reish.com/practice_areas/techni...ps/IRStip61.cfm

and here:

http://www.aspa.org/Main-Menu/Advocacy/Gov...irs_qa.htm.aspx

[AndyH]

Exactly on point. Terrific. Thank you!

[david rigby]

This may be relevant.

Gray Book 2001-35

DC Plan Issues: Minimum DC Allocation for Top-heavy Plan

Plan A is a calendar year top-heavy defined contribution plan that covers employees of divisions X, Y and Z. Employees of division Z will no longer be covered by Plan A beginning on January 1, 2001 but the plan will continue to satisfy the nondiscrimination rules under IRC 410(b) and 401(a)(4). Thus, no new employees of division Z will be eligible to become plan participants. Must those employees of division Z who were already participating in Plan A continue to receive top-heavy contribution allocations? If, instead, Plan A were a defined benefit plan, would employees of division Z who were already plan participants continue to receive top-heavy benefit accruals?

RESPONSE

Employees of division Z who are participants in Plan A must continue to receive top-heavy minimum contributions (or benefit accruals in the case of a defined benefit plan) as if the plan had not been amended to suspend further contributions or benefits. However, no such additional contributions or accruals will be required if the assets and liabilities with respect to employees who are participants in Plan A are spunoff to a separate plan, such separate plan is not top-heavy, has no key employees and is not aggregated with plan A to satisfy the IRC 410(b) or 401(a)(4) nondiscrimination rules.

The above Response is a summary, prepared by representatives of the Program Committee, of the oral responses to the question posed to certain staff members of the Treasury and IRS, which represent only personal views of the individuals who provided them. Accordingly, the Response does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any taxpayer for any purpose.

Copyright © 2001, Enrolled Actuaries Meeting

All rights reserved by Enrolled Actuaries Meeting. Permission is granted to print or otherwise reproduce a limited number of copies of the material on the diskette for personal, internal, classroom, or other instructional use, on the condition that the foregoing copyright notice is used so as to give reasonable notice of the copyright of the Enrolled Actuaries Meeting. This consent for free limited copying without prior consent of the Enrolled Actuaries Meeting does not extend to making copies for general distribution, for advertising or promotional purposes, for inclusion in new collective works, or for sale or resale.

[AndyH]

Wow. Opposite answer. Must have been Dick W

Thanks!