Top Heavy Plan - Former Key - attribution

[Guest Holly Foster]

I have a top heavy plan with constantly changing ownership. When a key employee's ownership drops below 5% (or 1% and earnings drop below the required amount) they become a former key employee, and their account balance in the plan is excluded in determining the top heavy ratio. For all other purposes (minimum vesting and benefit) they are a non-key employee.

Many of these key employees also have children working at the firm. When the key employee owns more than 5% (or 1% and earnings are over the required amount) the child is also considered a key employee by attribution (IRC 318). However in a following year when at any time during the year the parent's ownership fell below 5% (or 1% and earnings drop below the required amount) and the parent is considered a former key employee, and their account balance in the plan is excluded in determining the top heavy ratio, is the child also a former key employee, and their account balance in the plan also excluded in determining the top heavy ratio? Or are they just non-key and their balance still included in the top heavy ratio?

The confusion is in the section in the top heavy regulations that refers to 318 attribution, only refers to attribution to a key employee, not to a former key. And the part of the regulations that discusses former key employees gives examples with ownership losses for the key employee but never discusses that someone who has ownership by attribution could also be a former key. On the other hand the regulations do define former key as someone who used to be key.

thanks!

holly

[Lou S.]

On the other hand the regulations do define former key as someone who used to be key.

Great question! But unfortunately I think you answered it right here.