top heavy testing on a first year plan

[Guest Susan M.]

Hello,

I have a first year plan that started in 2012.

A profit sharing 401(k) plan fails the ADP test and the key employee must return $9,000 of deferrals.

When the plan is tested for top-heavy status as of 12/31/2012, taking into consideration the key employee's total salary deferrals, the plan is top heavy.

When the plan is tested for top-heavy status as of 12/31/2012, taking into consideration the key employee's salary deferrals reduced by the $9,000, the plan is not top heavy.

Can the top heavy test be based on the key employee's salary deferrals reduced to pass the ADP test?

Thank you

sue

[Lou S.]

No. You have to included them.

[Tom Poje]

if it helps, the reason being:

1. the HCE is still working

2. therefore the distribution is an 'in-service' distribution

3. you include in-service distributions for 5 years.

now,all that being said, for the first year of a plan, 1.416-1 T 24 says

adjustment should also reflect the amount of any contributions made after the determination date that are allocated as of a date in that first plan year.

so, without knowing the numbers involved or the terms of the document, it might be possible to allocate 1% (or whatever) to the NHCEs and take the plan out of top heavy (which would also mean next year as well which is probably even more important!)

others have indicated you could use a corrective amendment to simply allocate a contribution to nhces because the rules don't even require the contribution to be 'corrective'

(or if it is late and the ADP refund hasn't been completed, alloacte enough of a QNEC to the NHCEs to take the plan out of top heavy)