Top Heavy Agrgregation

[KJohnson]

A law firm has a top-heavy profit sharing plan that excludes associate attorneys but passes coverage. Figuring its "their money" the firm begins a separate 401(k)plan for elective deferrals only, allows associates to particpate, but also allows key employees to participate. The plans, on an aggregate basis are top heavy.

1) I assume the firm now must make a 3% contribution for associates into the 401(k) plan because the Plan is no mandatorily aggregated with the profit sharing Plan. Does anyone disagree?

2) Is there a way around this prospectively?. It does not appear that the 401(k) can be terminated and a new plan started includng associates/non-keys only because of the successor plan rules.

3) If the 401(k) Plan was "frozen" so no future deferrals were allowed, would a top heavy contribution still be required because of the frozen plan's aggregation with the profit sharing plan and the fact that keys are getting 3% or more into the existing profit sharing plan? [1.416-1 Q&AT-5 read with 416©(2)(B)(ii)(I)].

4) If you prospectively eliminate participation of the keys in the 401(k) would you then have to wait 5 years before mandatory aggregation would not apply?

5) Any other ideas on a way "around" the top heavy contribution problem prospectively?

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

[This message has been edited by KJohnson (edited 05-10-2000).]

[KJohnson]

Any ideas out there on this?

[KJohnson]

Thanks Pax. The issue that has the law firm "riled" is that they were not planning on making any employer contributions for Associates and had specifically excluded them from the profit sharing plan. So if the Associates are not participants in the p.s. plan and are therefore not getting the p.s. contribution of 3% or more, must they receive a top heavy contribution in the 401(k) Plan and is there any way to prospectively solve this problem?

[KJohnson]

Thought I would run this by one more time.

[david rigby]

I agree that the plans must be aggregated, but you do not have to make more than one T-H contribution to an aggregation group. If the ER contribution in the profit sharing plan is 3%, I think that covers the other plan(s) as well.

Of course, all plans in the T-H group must use a vesting schedule at least as generous as the T-H vesting schedule, even if the contribution/allocation/accrual is made in only one of the plans.

[david rigby]

Ouch. One of the worst plans possible is a T-H 401(k) plan.

It may be possible that some of the associates are Key EEs and can be excluded from the T-H 3% contribution, but it looks like the law firm will have to include some T-H contribution somewhere.

[Guest JAREL]

I'm not sure I understand why you can't just set up a new 401(k) plan for the Associates, amend the existing 401(k) plan to only cover Partners/Staff, transfer all Associate account balances to the Associate plan. Then, if you can pass coverage without the Associates, you don't have to aggregate the plans (assuming no Keys in Associate plan). A client of mine did this a number of years ago. What am I missing?

[KJohnson]

Great idea! I assume once the account balances are transferred they would no longer be considered participants in the old 401(k) and the plan to plan transfer rules in T-32 make it clear that the Associates balances will be considered as part of the new 401(k) plan rather than the old 401(k) plan for top heavy purposes.

[Guest JAREL]

That's correct. They are "related rollovers" so they go with the receiving plan.

[Guest 1950]

Good ideas, but there's a possible hitch. Check out the first sentence of Reg. 1.416-1 T-Q&A6: "... the required aggregation group includes each plan of the employer in which a key employee participates in the year containing the determination date, or any of the four preceding plan years." This sentence can be read two ways (at least). It might simply mean you aggregate every plan that in the PY containing the DD and the 4 preceding PYs that had any participant who -- not nessarily now, but in those prior years -- was a key EE. Or -- and this one is fatal -- it might mean you figure out who your keys are in the PY containing the DD ... and then any plan those EEs participated in during that PY or any of the preceding 4 PYs is aggregated, even if he/she was NOT a key in such prior PY. If the second reading -- which I think is crazy business -- is right, your new >1%/>$150K partners would cause the assoc 401(k) plan to be aggregated since they were in it during the preceding 4 PYs. The weren't keys back then, but they are now and they were in it in "the four preceding plan years". That'd be a terrible surprise to find out a few years down the road that the IRS thinks the associates' 401(k) plan is top-heavy by virtue of aggregation. Suggest you put some language about TH aggregation in the plan doc that forces this issue, highlight it in the request for FDL and get a specific determination on the point. They'll probably tell you to replace it with LRM language which avoids the issue (imagine that?); if so, you might go for tech advice. Note: Because of the way the DD is defined in first year, you get at least one year with no aggregation if you're wrong, so it's sort of a free look.

Anybody out there have a different view?

[Guest 1950]

Just to refresh this posting -- has anyone thought about the issue I raise regarding required aggregation? I just has another actuary call me to discuss this. He says the ASPA folks are worried about required aggregation where a non-key in one plan moves to another plan of the same employer upon becoming a key employee. I think 1.416-1TQA6 is contrary to the Code, but it'd be nice to hear from anyone who has thought about this 'cause it'd be an ugly problem to fix after a few plan years down the road.

[KJohnson]

I gave a try a few weeks back on this same issue and did not come up with anything.

http://benefitslink.com/boards/index.php?showtopic=9893

Although, not directly on point, I do think that T-32 helps if you automtatically transfer account balances when an employee leaves one plan and enters the other. T-32 acknowledges that there can be plan to plan transfers within plans maintained by the same employer and specifically deals with the top-heavy consequences of such transfers. In such instances the "receiving" plan takes into account the transferred funds for the top-heavy calculation and the distributing plan ignores such an account balance.

It would be strange to have such a regulation, if, upon transfer of an account balance related to a key, there would be automatic mandatory aggregation so it really would not matter which plan includes the acoount balance in its calculation.

[Guest 1950]

Thanks for the reply and directing me to the other thread. Your discussion is on point. I agree with you're analysis: I think T32 is very telling. Am considering submitting a plan for determination that specifically raises this issue and directing the IRS' attention to the provision to force consideration. I gather you haven't done so. Given any thought to that as a way to resolve it?