Top-Heavy Calculation

[Guest johnarmknecht]

In calculating the 1999 Top Heavy test for a plan with a 12/31 plan year end, I have the following calculations in which I am confident of the calculations:

12/31/98 Balances for Key EEs = 3,096,677.97

12/31/98 Balances for ALL EEs = 7,193,148.80

Withdrawals made from 1994 to 1998 Plan Year

Key = 80,303.40

Non Key = 118,353.20

Which calculation below is correct?

1)

3,096,677.97 / (7,193,148.80+80,303.40+118,353.20)

OR

2)

(3,096,677.97+80,303.40) / (7,193,148.80+80,303.40+118,353.20)

Since it passes no matter which is used, it is not critical in this example but where the ratio is close to the 60% thershold, it could make the difference.

I personnally believe that formula (2) is correct but would appreciate others input.

Thanks

John Armknecht

[Guest]

John, the correct answer is "2." According to IRC 416(g)(3) and Treas Reg 1.416-1, T-30 and T-31, distributions made during the 5 year period ending on the determination date are "included" in the top heavy ratio. This means that distributions for both key and non-key employees are added back.

Hope this answers your question and I hope everything is good with you.

[Guest]

1 is certainly wrong, but 2 needs further clarification.

from your 12/31 balances, exclude anyone who has not performed services for 5 years. (ees who have terminated 5 years ago but are not paid out)

also, if plan is profit sharing, do not count the profit sharing contributions made after 12/31 for the 1998 plan year.

[david rigby]

Tom is correct, but a further point of clarification:

For those who have not performed an hour of service in the past 5 years, do not count the account balances OR the payouts, even if the payout occurred in the last 5 years. But beware, in some companies, rehires even for short time periods may be common.