Top Heavy

[cdavis25]

Company A sponsors a 401(k) Plan. A division from A goes to form a new Company B on 4/1/2011 and adopts the 401(k) Plan of Company A on 4/1/2011. Company A owns 45% of B, so they are unrelated employers. The 401(k) Plan is a multiple employer Plan. There are a group of employees that go to work for B on 4/1/2011. They are listed as terminated with A on 3/31/2011. An ERISA attorney wrote the resolution/amendments to have B adopt the Plan. They also wrote in that documentation that the historic accounts of the impacted employees maintained under the 401(k) Plan were prospectively associated with B under the 401(k) Plan. So, theses employees did not initiate any transfer or rollover.

Code section 416 says you cannot include the account balance from one employer (or controlled group) in the top heavy testing of an unrelated employer's plan.

T-32 Q. How are rollovers and plan-to-plan transfers treated in testing whether a plan is top-heavy?

A. The rules for handling rollovers and transfers depend upon whether they are unrelated (both initiated by the employee and made from a plan maintained by one employer to a plan maintained by another employer) or related (a rollover or transfer either not initiated by the employee or made to a plan maintained by the same employer).

Generally, a rollover or transfer made incident to a merger or consolidation of two or more plans or the division of a single plan into two or more plans will not be treated as being initiated by the employee.

The fact that the employer initiated the distribution does not mean that the rollover was not initiated by the employee.

For purposes of determining whether two employers are to be treated as the same employer, all employers aggregated under section 414(b), © or (m) are treated as the same employer.

In the case of unrelated rollovers and transfers, (1) the plan making the distribution or transfer is to count the distribution as a distribution under section 416(g)(3), and (2) the plan accepting the rollover or transfer is not to consider the rollover or transfer as part of the accrued benefit if such rollover or transfer was accepted after December 31, 1983, but is to consider it as part of the accrued benefit if such rollover or transfer was accepted prior to January 1, 1984.

In the case of related rollovers and transfers, the plan making the distribution or transfer is not to count the distribution or transfer under section 416(g)(3) and the plan accepting the rollover or transfer counts the rollover or transfer in the present value of the accrued benefits.

Rules for related rollovers and transfers do not depend on whether the rollover or transfer was accepted prior to January 1, 1984.

Now, my question is how do you treat the account balances for the affected employees that transferred from A to B for top heavy testing? Do they count in the test for A or B?

These companies are unrelated. The money never left the Plan. The employees did not initiate the "transfer" or the "prospectively associated".

[shERPA]

Resurrecting this topic - we have a multiple employer plan where some employees transferred from employer A to employer B. Their plan participation continued uninterrupted, no distributions, rollovers or transfers, they are simply on B's payroll now instead of A's.

Does their entire account balance transfer to B for top heavy purposes like an related, employer-initiated transfer? Or does their balance need to be bifurcated and allocated to each employer's top heavy test (and then drop off A's test)?

Treating as an employer-initiated transfer seems to make the most sense but I can't find any guidance on this one way or the other.