Off-Calendar Top Heavy Test

[Guest compliance31]

When running a top heavy test for a non-calendar year plan, how do I determine the amounts that can be considered "Catch-Up" for the year, and thus disregarded for the test? Take a plan with a 10/31/2011 year end and no plan-imposed cap on deferrals: Is the catch-up amount determined using 2010 and/or 2011 calendar year deferral amounts, plan year deferrals (11/1/2010-10/31/2011) minus $16,500, something else??

Off-calendar plans make my head hurt, so ANY help would be greatly appreciated.

Thanks!

[ETA Consulting LLC]

I would just use the account balance at year end and ignore the catch-up.

Good Luck!

[Guest compliance31]

I would just use the account balance at year end and ignore the catch-up.

Good Luck!

I appreciate the thought, but the client is basically right at 60%. So if I have to inform them that they will need to make an extra $10k in contributions, I want to be sure.

Does anybody else have ideas?

[ETA Consulting LLC]

It's really not a subjective process. There is a standard to apply when determining if the plan is top-heavy. Those rules are explicit and typically written in detail in your plan document. Once the plan is determined to be top heavy, then there is another set of rules pertaining to the Top Heavy Minimums that are required. When you bring the concept of catchup into the conversation; the question becomes exactly what are you trying to accomplish; and how do you think a catchup contribution impacts the determination as to whether the balances for key employees exceed 60% of all balances in the plan? I am not aware to top heavy being any different for an off calendar year than it would be for a calendar year; you're primarily looking at account balances on a single day when making the determination (and adding in inservice distributions and subtracting certain excluded amounts such as rollovers).

Good Luck!

[John Feldt ERPA CPC QPA]

I would assume the plan sponsor is already expecting this possibility based on last years' conversations with their administrative firm, where that TPA told them that the plan is near and/or at least approaching top heavy status. Probably options were discussed last year on how to avoid the situation and maybe even the safe harbor top-heavy exemption was discussed. If that did not occur, as we saw with a local TPA shop in our area, then consider their approach: they suggested to the client, in writing, that they should adopt a safe harbor match retroactively to the beginning of the plan year and backdate the amendment. In other words, they suggested that the client commit tax fraud (backdating) to avoid the contribution. They no longer work with that TPA firm, but it was eye opening to see such a suggestion provided in writing - amazing!

[Lou S.]

I would just use the account balance at year end and ignore the catch-up.

Good Luck!

How do you ignore the catch-up for top heavy? While catch-up does not count for nearly all testing limits, it is included in the participant's balance for top heavy determinations unless my understanding of the rules is compeletely off base.

edit - I should have read your followup response which I agree with 100%.

[ETA Consulting LLC]

How do you ignore the catch-up for top heavy? While catch-up does not count for nearly all testing limits, it is included in the participant's balance for top heavy determinations unless my understanding of the rules is compeletely off base.

I wrote it poorly. I was saying ignore the concept of excluding the balances attributable to catch-up and just use the balance that is there. We're on the same page

[Guest compliance31]

It's really not a subjective process. There is a standard to apply when determining if the plan is top-heavy. Those rules are explicit and typically written in detail in your plan document. Once the plan is determined to be top heavy, then there is another set of rules pertaining to the Top Heavy Minimums that are required. When you bring the concept of catchup into the conversation; the question becomes exactly what are you trying to accomplish; and how do you think a catchup contribution impacts the determination as to whether the balances for key employees exceed 60% of all balances in the plan? I am not aware to top heavy being any different for an off calendar year than it would be for a calendar year; you're primarily looking at account balances on a single day when making the determination (and adding in inservice distributions and subtracting certain excluded amounts such as rollovers).

Good Luck!

I was too quick to post the question. I had seen the following in the ERISA outline book and immediately thought that maybe there was a way to reduce the key employee percentage (since most all of them had catch-up) and help the client:

"IRC §414(v)(3)(B) provides that a plan is not treated as failing the requirements of certain tax code sections, including IRC §416, by reason of the making of catch-up contributions. What does this mean? According to the Treasury, it means that catch-up contributions are disregarded for top heavy purposes, but only for the plan year in which they are made. See Treas. Reg. §1.414(v)-1(d)(3)(i)."

They more I read on, the more I realized that it was not applicable.

Sorry for the confusion, but thanks for the help.