Who is responsible for top-heavy testing?

[Guest WDH]

This question concerns who is responsible and ultimately liable to insure that a 401(k) plan makes the required minimum contributions for plan years when the plan is top-heavy. The relevant facts are described below. A relatively small (less than 200 employees)privately-held company adopted a prototype 401(k) plan sponsored by a local bank. The bank serves as trustee and agreed to perform the discrimination and top-heavy testing each year. The bank performed the required testing each year and provided the testing results to the company in the form of a written report. The plan satisfied the discrimination tests (ADP test), but has been top-heavy since 1992. In 1999, the company realized the plan has been top-heavy since 1992 and that the required minimum contributions were not made for 7 plan years. The company is working with the IRS to correct the problem and make the required contributions. The company believes the bank should pay 100% of the liability because the bank did not make any effort to inform the company that the plan was top-heavy other than disclose that conclusion in the annual testing report results each year. The company believes the bank should have personally informed the company the first year the plan was top-heavy and discussed their options to correct the problem for future years. That did not happen and the plan remained top-heavy for several years. Each year, the bank concluded the plan was top-heavy in its reports, but did not make any effort to correct the problem.

Are you aware of any authority supporting a claim against the bank under these circumstances? As a fiduciary, did the bank have an obligation to correct the problem when it first discovered the plan was top-heavy? In subsequent years?

[david rigby]

No expert I , but that never stopped me before.

It seems to me important that you check carefully whatever agreement(s) exist between the bank/trustee and the plan sponsor. I am not aware of trustee arrangements that also expect the trustee to provide consulting advice.

As a sidebar, just how many participants are in this plan? If the plan has 100+ participants and is top-heavy, I would think about getting someone to review it. I have seen many top-heavy plans and only one had more than 75 participants.

[This message has been edited by pax (edited 02-29-2000).]

[Guest]

I do not know the answer to your question, however I would raise the following issue:

If document says top heavy min goes to non keys, then you must make sure to rerun top heavy test every year. it could very well be that the plan will go out of top heavy after a couple of years. e.g. after putting in the minimum for 1992 and 1993 maybe the plan is no longer top heavy.

just a possible suggestion.

[Jon Chambers]

I don't think that the argument that the bank trustee is responsible for funding the top heavy contribution will get very far. If the bank was supposed to perform the test, and did, the fact that the company didn't know how to interpret the information, or to act on test results, is essentially irrelevant. The Plan Administrator (typically, the company) is the fiduciary generally responsible for compliance with the Code. There may be an argument that the trustee shares co-fiduciary liability with the Plan Administrator, since they either knew, or should have known, that the top-heavy contributions weren't being made. However, most trust agreements are drafted (by the trustee) to circumvent this argument. Unless there is a reasonable testing argument (as suggested by other posters), the company should plan on making the top heavy contributions.

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Jon C. Chambers

Principal

Schultz Collins Lawson Chambers, Inc.

(415) 291-3004

[rcline46]

You've got to be kidding. First, the definition of KEY employees must be checked. I find it VERY hard to believe a 401(k) plan which passes ADP and has 200 eligible ees to be T/H! (Unless there are a lot of family members!!)

Second, I think the bank fulfilled its obligation barring some special contract features. The Plan Administrator failed.

Third, if it were our plan, we would have accrued the TH contribution regardless of what the client wants, because it is required to be paid. It would not 'disappear'.

Fourth, what is this bit about 'correcting' the TH problem?

Now the bank knows why you hire TPAs.

[david rigby]

rcline46,

What does passing ADP have to do with being (or not being) topheavy? Answer: nothing.

You are more correct to focus on the number of EES. However, note that the original question did not say 200 EEs. It said "less than 200". From the information presented, we do not know if this means 90 or 190.

I too have doubts that a plan with 100+ participants is top heavy, but my original recommendation is unchanged: get a second opinion.

[This message has been edited by pax (edited 03-01-2000).]

[Guest WDH]

Thank you for the responses. The company has approximately 50 employees and 35 participants in the plan. I apologize for any confusion regarding the number of possible participants. Based upon my review of the issue, I agree that it will be difficult to hold the bank responible for any portion of the required minimum contributions that should have been made, absent a contractual responsibility for advising or otherwise consulting with the company to address a top-heavy plan. Additionally, while the fact that the bank served as trustee at least gives the company an argument that the bank had a fiduciary responsibility to address, not just identify, the top-heavy problem, the plan documents (which I hope to review tomorrow) will most likely place that responsibility on the company. Any additional input would be appreciated. Thanks again for your responses!