top heavy question

[Guest stanlipton]

An excluded person(excluded by class) in a ps plan is brought in to pass 410b testing because he is nhce.

He gets top heavy contribution.

the following year he is hce;and doesnt have to be "brought in" to pass 410b

Q: must he be considered participant for top heavy?

ty

Slipton@intpen.com

[12AX7]

Top Heavy minimum contributions apply to Non-key employees. An HCE could be Non-key.

[Tom Poje]

as 12AX7 pointed out, the imprtance distinction is 'key' and not 'HCE'

taking this one step further, let's suppose the person in question was non-key and then became key. then what?

At the 2011 ASPPA Conference the IRS personal answered this in the foollowing way:

Margaret became a participant in a 401(k) plan in the 2010 plan year, which ends December 31, 2010. For 2010, Margaret did not satisfy any of the key employee tests. The plan is top heavy for 2011 because the top heavy ratio exceeds 60%. The top heavy ratio is computed as of 12/31/2010, which is the determination date for the 2011 plan year. For that calculation, Margaret's account balance as of 12/31/2010 is treated as a non-key employee account balance. During the 2011 plan year, Margaret marries the majority owner of the company. This makes her a more-than-5% owner of the company by attribution. Does Margaret receive a top heavy minimum contribution for the 2011 plan year? Should she have received a top heavy contribution for the 2010 plan year even though the employer didn't fund the contribution until 2011 after Margaret already had married the owner?

IRS response. There is no guidance directly on point, but the most reasonable interpretation is that Margaret receives a top-heavy minimum contribution for 2011. For top-heavy purposes, a single determination date is prescribed by IRC § 416(g)(4) for determining both whether the plan is top-heavy and whether an employee is a key or non-key employee. While it would be intuitive to adjust this determination based on events occurring within the year after the determination date, this interpolates a condition that is not in the statute. Note that the House Report (H.R. Rep. No. 107-51) and Conference Committee Report (H.R. Conf. Rep. No. 107-84) accompanying EGTRRA § 613 both provide that the determination date is used for identifying who is a key employee in the following year.

2011 ASPPA Conference #47

[Guest stanlipton]

Thanks;but the question is really not key vs hce.

What I mean is this:

if person was excluded from plan in 2010;but HAD to be brought in purely to pass 410b testing;what happens in 2011 if she's no longer needed to pass 410b?

is she still a participant for purposes of receiving a top heavy benefit?

Thanks

[Jim Chad]

She has an account balance but is now back in the excluded class? I would say she is not entitled to a top heavy contribution. What do you all think?

[Tom Poje]

Jim hit it on the head, basically, it depends on what the corrective amendment said.

or at least a good implication that a corrective amendment should be pretty specific.

a good one would probably have said something like

In order to pass coverage testing, for the plan year ending 2010 only, Mr X will be treated as a member of the elibile class of employees and receive a contribution of $xxx.

if all the corrective amendment said was in order to pass coverage, Mr. X would be a member of the eligible class of employees and receive a contribution in 2010, then I'd hold he continues to be a member of the eligible class of employees because there is nothing in that statement indicating he would cease to be a continuing participant.

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

as a side note, this situation looks like a loophole, for a corrective amendment should be provided to a nondiscriminatory group. so, for example, in this case, suppose I have 10 possible ineligble ees to provide a contribution to pass coverage. this ee made 150,000 and was given a contribution to pass coverage. Now the following year he is an HCE, a fact I knew beforehand, but at the time he was an NHCE. That doesn't smell quite right. but then, that is the way my brain works.

[BG5150]

If the plan has fail-safe language, I don't think an amendment would be needed. He would have come in per the document. I thought those situations were only for the year(s) in question, and that the eligibility doesn't carry over.