Top Heavy Determination and 401(k) Receivables

[Rob P]

When making a TH determination, are 401(k) employee deferrals deposited after the close of a plan year accounted for in the year that they were deferred or the year that they were actually deposited?

I.e., A 2012 TH determination is based upon the 12/31/2011 account balances (calendar year plan). Does a 2011 401(k) deferral accrued on 12/31/2011 but deposited in 2012 get added back to the 12/31/2011 account balances?

I’ve read several prior threads and Sal’s EOB. Has the IRS addressed this issue since 2002?

I have a situation with a partnership where several partner’s made an election to defer prior to 12/31/2011, but didn’t actually make their deposits until March 2012. If I account for the deferrals on an accrual basis, the plan is TH for 2012 and if I account for the deferrals on a cash basis than the plan is not TH for 2012. The partners do not want to make any employer contribution for 2012 but of course want to defer.

Any input is appreciated.

[Bird]

I can tell you that in my office, they'd be included in the year deferred. I don't know that there's a definitive answer (there should be!) but in my mind, the timing of deposits shouldn't affect such things.

[BG5150]

I've always done my Top Heavy calcs on a cash basis, with the exception of the first year. In the case of the initial year, we use receivables.

The EOB suggests that deferrals that are within the 7 business days safe harbor that have not been deposited before the determination date do not have to be counted (because they don't HAVE to be in the trust until some time the next year). Deferrals that are "late" should be counted.

[Rob P]

Thanks.

When the question first came up in our office my thoughts were the same as Bird’s that deferrals should be included in the year deferred; truthfully I would have thought it a “no brainer”. So much for intuition. As a policy I have always included them and have only treated employer discretionary profit sharing contributions on a “cash basis”. However, I was a little surprised after reading the EOB and prior threads from 5+ years ago that say it was never addressed by the IRS.

BG5150 – I saw Sal’s recommendation in the EOB. I agree that his idea is that you simply apply the DOL deposit guidelines to your assets determination regardless of when the deposit actually takes place. As such, if a payroll deposit “should” have taken place on or before the end of the plan year then you include that receivable in your assets. If the payroll deposit didn’t have to be made until after 12/31 you would exclude that deposit.

In this case it is a small employer (so DOL SH rules can apply) and the partner’s deferral election would be as of 12/31/2011, so if I apply Sal’s recommendation the partner’s deferrals would be excluded and the plan is not TH for 2012.

[Bird]

I haven't gone to the EOB to see exactly what Sal says but I don't think you can necessarily use the DOL's rules on when deferrals become plan assets in this context. I was actually going to "go there" in my first post but decided that although it's a neat thought, the DOL's purposes are completely different from this determination and not relevant.

But you're probably a lot safer relying on Sal than on me!

[Rob P]

Thanks. Sal’s argument has to do with the timing of when the DOL actually defines receivables as plan assets. He usually has the final say in our office.