TOP HEAVY AND MANDATORY AGGREGATION

[KJohnson]

EMPLOYER HAS 2 DIFFERENT PLANS IN WHICH KEYS PARTICIPATE-- 401(k)COVERING ALL EMPLOYEES AND PS PLAN WHICH EXCLUDES A CERTAIN CLASS OF EMPLOYEES. PS PLAN IS TOP HEAVY BUT 401(k) WOULD NOT BE TOP HEAVY IF IT WAS NOT AGGREGATED. PLANS DO NOT NEED TO BE AGGREGATED FOR 410 OR 401(a)4).

EMPLOYER WANTS TO STOP MAKING THE TOP-HEAVY CONTIBUTION TO THE 401(k) FOR EMPLOYEES EXCLUDED FROM THE PS PLAN. CAN THIS BE DONE?

1) CANNOT TERMINATE 401(k) AND DISTRIBUTE ASSETS BECAUSE OF SUCCESSOR PLAN RULE.

2) IF YOU FREEZE THE 401(k) IT WOULD STILL HAVE KEYS WITH ACCOUNT BALANCES. WOULD THE 401(k) STILL BE PERPETUALLY AGGREGATED WITH THE PS PLAN SO THAT YOU WOULD CONTINUE TO HAVE TO MAKE TOP HEAVY CONTRIBUTIONS "FOREVER" FOR NON-KEYS WHO HAVE ACCOUNTS IN THE 401(k)? COULD YOU MAKE THE ARGUMENT THAT MANDATORY AGGREGATION STOPS AFTER 5 YEARS FOR FROZEN PLANS SINCE THERE IS NO ONGOING "PARTICIPATION?

3) IF YOU PROSPECTIVELY AMEND THE 401(k) PLAN FOR PARTICIPATION OF NON-KEYS ONLY YOU STILL HAVE THE PROBLEM IN 2 ABOVE. WOULD MANDATORY AGGREGATION STOP AFTER FIVE YEARS IN THIS SITUATION?

4) ANY IDEAS??--HOW ABOUT PROSPECTIVELY MAKING THE 401(k) PLAN FOR NON-KEYS ONLY AND "SPINNING OFF" THE 401(K) ACCOUNTS FOR THE KEYS OVER INTO THE PS PLAN?

[Guest JAREL]

I think the spinoff option would work. The rollover would be considered a related rollover and would be included in the profit sharing plan's top heavy test and not in the 401(k) plan. This is generally the approach that law firms take when an associate becomes partner (and potentially key). They are careful to transfer the account balances from the associates plan to the partners plan. This requires some monitoring since you need to know when someone will become key to avoid aggregation again.