Top Heavy/Key/Deferral question

[Cathy from Chicago]

Plan is Top Heavy in 2011 due to a participant being a Key in 2010; this participant is not a Key in 2011 - can he defer in 2011 as a non-key or will be still be considered a Key in 2011? Thanks.

[Guest Sieve]

He will be a non-key in 2011, and his deferrals will not be considered as a contribution to a key employee (& therefore will not impact whether minimum contributions must be made to non-keys in 2011).

Then when determining TH status for 2012 (at end of 2011 plan year), the former key's account will not be taken into account.

[Tom Poje]

the ERISA Outline Book in its discussion on Key Employees has an example of an ee who becomes an officer during the current plan year (Basically the opposite of your question)

Is he entitled to a top heavy minimum ?- YES in the current year, but not in the following year. IRS requires this for Prototypes/Master plans.

then the Outline Book goes on to discuss 'others' hold the opposite view. He is a key employee because he is an officer, therefore he is not entitled to a top heavy minimum.

I vaguely recall (or maybe I imagined it) that one of the document providers actually had a checkbox as to how to handle this situation as to whether the person would receive top-heavy.

[Cathy from Chicago]

Thanks much for your quick reply...appreciate it.

He will be a non-key in 2011, and his deferrals will not be considered as a contribution to a key employee (& therefore will not impact whether minimum contributions must be made to non-keys in 2011).

Then when determining TH status for 2012 (at end of 2011 plan year), the former key's account will not be taken into account.

[pmacduff]

I have an owner employee that was key through 2010. In November of 2010 he sold his portion of the Company to another person and retired.

He took his full distribution in 2011. I am running the top heavy test as of 12/31/2011 (for 2012 determination) and the system is disregarding his distribution because Relius is showing him as a "former key" in 2011.

I did not enter any overrides other than the date he sold/retired and was no longer an owner.

I want to be sure that the software is handling this correctly due to the size of the distribution.

I guess I thought that his distribution would count for the TH testing in 2011.

Do I just have "busy season" brain today?!

[Guest Sieve]

Distribution is ignored if an individual has not been an employee "at any time during the 1-year period ending on the determination date". (IRC Section 416(g)(4)(E).) That means that the account balance of an employee terminating in 2010 will not be added back in for a 2011 determination date (for 2012 TH). Looks like the software is acting properly.