Top Heavy Minimum / Plan Termination

[austin3515]

I have a new client where the prior "vendor" () never told the client they were top-heavy. I was reading the ERISA outline book and Sal suggests that one might make a legally definsible argument that the top-heavy minimum may not be due in the year that a plan terminates. The argument would almost certainly be rejected by the IRS (he says), but you could fit this into a literal interpretation of the regs. He strongly recommends against this approach (I want to make sure I make this clear!).

I seem to recall though that there was a recent IRS Q&A where this approach was publicly shot down by the IRS, and I'm need of that reference for purposes of these ongoing discussions. If anyone has it, I would appreciate it.

Thanks!

[ETA Consulting LLC]

I have a new client where the prior "vendor" () never told the client they were top-heavy. I was reading the ERISA outline book and Sal suggests that one might make a legally definsible argument that the top-heavy minimum may not be due in the year that a plan terminates. The argument would almost certainly be rejected by the IRS (he says), but you could fit this into a literal interpretation of the regs. He strongly recommends against this approach (I want to make sure I make this clear!).

I seem to recall though that there was a recent IRS Q&A where this approach was publicly shot down by the IRS, and I'm need of that reference for purposes of these ongoing discussions. If anyone has it, I would appreciate it.

Thanks!

Seeing as how the TH determination date is the last day of the preceding plan year, you'd normally know that a TH minimum will be required should a Key Employee benefit under the plan. Also, this would appear to be written into the language of any plan document; so, irrespective of the regulations that 'may' govern what may be written into the plan, you should follow the plan's terms (as we know they will likely not provide for something the regulations doesn't allow when stating how the TH minimums will be provided).

I guess I'm basically saying, just follow the terms of the plan. Any other approach being used would, at least, have to be written into the plan.

Good Luck!

[rcline46]

I think the process is like this: Top Heavy in a DC plan is given to anyone who is a participant in the plan at year end (no hours requirement). If you terminate a plan prior to year end, the no one would be a participant at year end. However, the Final 415 Regulations introduced the concept that the plan termination date creates a 'short year' requireing the normal pro-ration of certain items and also treating the termination date as if it were the year end. This then creates the need for a Top Heavy contribution.

Note: this 'short year' is not treated as a short year for 5500 purposes.

[austin3515]

But then why would Sal's 2011 book still include that paragraph?

[david rigby]

Perhaps I misunderstand the facts. If prior years were TH but the TH rules were not followed (affecting both current and former participants), it seems prudent to address those years before addressing the current year.

[ETA Consulting LLC]

I think the process is like this: Top Heavy in a DC plan is given to anyone who is a participant in the plan at year end (no hours requirement). If you terminate a plan prior to year end, the no one would be a participant at year end. However, the Final 415 Regulations introduced the concept that the plan termination date creates a 'short year' requireing the normal pro-ration of certain items and also treating the termination date as if it were the year end. This then creates the need for a Top Heavy contribution.

Note: this 'short year' is treated as a short year for 5500 purposes.

Okay, now I understand the argument

Was it always "a participant" at year end or "employed" at year end?

At least I got the gist of the argument.

[rcline46]

I had to add 'not' to my prior post. I understand your question - the participant had to be still employed.

[Tom Poje]

only cuz I have to talk about top heavy at the next Annual Conference, so I have the notes handy.

Otherwise I'm not a nice enough guy to look it up.

.........................................

DC plan is top heavy and has a plan year ending 12/31. The plan terminates on September 15, 2010. Normally, TH minimums are provided only if the employee is employed on the last day of the plan year. (Assume that there are salary deferrals during the year so that, if a top heavy minimum is required, it needs to be made.)

(1) For the 2010 plan year, is 9/15/2010 treated as if it were the last day of the plan year, so that only non-key employees who are employed on that date are entitled to a TH minimum?

Of course, if there is no employer contribution, there would not be an obligation to provide top heavy minimum contribution. But, if there were contributions to keys during the year, including elective deferrals, there is a top heavy minimum based on compensation and employment through 9/15/10. Plan must liquidate within a reasonable time under Rev. Rul. 89-87 or else 9/15 date may not be reasonable. There is effectively a short plan year for top heavy purposes.

(2) If (1) is Yes, is the 3% minimum calculated for compensation from 1/1/2010-9/15/2010?

YES

(3) Is the answer to any of the above affected by whether the employer continues in existence through the end of 2010?

No change.

2010 ASPPA Conference Q and A #3

[austin3515]

Tom, you are outstanding... I knew I saw something!!