Top Heavy and Forfeiture Reallocation

[Guest dhall]

A plan REALLOCATES forfeitures (i.e. doesn't use them to REDUCE the contribution). The plan is Top Heavy. Client is insisting that the reallocation will REDUCE his minimum Top Heavy contribution. I disagree, and think he still has to make the original contribuiton PLUS reallocate the forfeitures on top of it. True?

[Kevin C]

Unless they have a really strange document provision, I agree with your client. The forfeiture allocation counts towards the TH minimum.

1.416-1 M-7 Q. What is the defined contribution minimum?

A. The sum of the contributions and forfeitures allocated to the account of any non-key employee who is a participant in a top-heavy defined contribution plan must equal at least 3% of such employee's compensation (see Question and Answer T-21 for the definition of compensation) for that plan year or for the calendar year ending within the plan year. However, a lower minimum is permissible where the largest contribution made or required to be made for key employees is less than 3%. The preceding sentence does not apply to any plan required to be included in an aggregation group if such plan enables a defined benefit plan required to be included in such group to meet the requirements of section 401(a)(4) or 410. The contribution made or required to be made on behalf of any key employee is equal to the ratio of the sum of the contributions made or required to be made and forfeitures allocated for such key employee divided by the compensation (nor in excess of $200,000) for such key employee. Thus, the defined contribution minimum that must be provided for any non-key employee for a top-heavy plan year is the largest percentage of compensation (not in excess of $200,000) provided on behalf of any key employee for that plan year (if the largest percentage of compensation provided on behalf of any key employee for that plan year is less than 3%).