top heavy calculation

[Guest ghal]

I have a new client with the following situation:

401k plan (not a safe harbor), it is top heavy, no match or nonelective contributions.

There is one key employee (and he is also the only hce), he defers $5,000 (he is not catch up eligible), the non highly ADP participantion rate is 0%. The key/hce employee then receives a refund of $5,000 to correct the ADP test.

The key makes $150,000. Is the top heavy mininum 3% or is it nothing since 100% of his deferral was refunded? I can't seem to find an answer anywhere.

Thanks

CPC, ERPA, QPA, QKA

[ETA Consulting LLC]

Despite receiving the refund, the Key Employees Annual Additions under Section 415 is still $5,000. Remember, excess employee contributions are still annual additions. You could look at having the employer contribute a 3% QNEC to the plan (including the Owner) and received only 1% refund from deferrals.

Good Luck!

[Guest ghal]

Thanks for the fast response. As a follow up to the previous question. This company will be bought this year and will merge their plan with the purchaser during 2012. The plan is still top heavy for 2012 (the plan they are merging to is not top heavy). I am thinking that the top heavy minimum (the key is still currently deferring) will be due to the existing plan calculated as of the date of the merger. Would you agree?

Thanks

[Tom Poje]

based on the numbers the key ee ADP % is 5000/150000 = 3.33%

so top heavy is 3% and yes depite the fact it is refunded.

If he has already received a refund then it is a little late to be providing a QNEC.

If he hadn't received a distribution, then a QNEC of 1.67% to pass testing and a 1.33% profit sharing to cover remainder of top heavy would have worked as well.

if the owner also received the QNEC I would have the numbers at 6.33 to 3%, which would still require a refund of 1.33% to pass, but maybe I missed something in your description (or the toolkit mistyped something in his answer)

[Tom Poje]

this was a response at the ASPPA Q and A a few years ago. One must remember that any such respone by the IRS folks does not necessarily represent an actual Traesury postion.

Q32) Top heavy: If the client has a shift in ownership such that another company becomes a member of a controlled group of companies and both companies have a calendar year defined contribution plan, what is the procedure for determining the top heavy status for the first plan year the companies are related? For example, Company A had a top heavy ratio of 65% as of 12/31/2005 and would normally give top heavy minimum contributions to its employees as of 12/31/2006. Company B's plan only has a top heavy ratio of 20% as of 12/31/2005 which does not require a top heavy contribution. If the employers became related after 12/31/2005 but before 12/31/2006, would Company A need to give a top heavy contribution if the top heavy ratio of the combined plans as of 12/31/2005 was under 60%?

A: Yes. You look to the status at the end of previous year, so A is still top heavy in 2006.

2007 ASPPA Conference #32

[Guest ghal]

thanks, you are awesome