Is TH minimum triggered if partner ends year with no comp

[jkharvey]

The employer made deferral contributions during the year for the 2 partners. Ned of year comes around and the partnership has a net loss, so those "deferrals" that were deposited are returned to the employer. Did these deposits trigger a TH requirement for the plan?

[Kevin C]

I think the answer is yes, the deferral deposits trigger the TH minimum.

If the deferrals are considered excess deferrals, it's an easy answer.

1.402(g)-1(e)(i)(ii)Treatment of excess deferrals as employer contributions.—For other purposes of the Code, including sections 401(a)(4), 401(k)(3), 404, 409, 411, 412, and 416, excess deferrals must be treated as employer contributions even if they are distributed in accordance with paragraph (e)(2) or (3) of this section. However, excess deferrals of a nonhighly compensated employee are not taken into account under section 401(k)(3) (the actual deferral percentage test) to the extent the excess deferrals are prohibited under section 401(a)(30). Excess deferrals are also treated as employer contributions for purposes of section 415 unless distributed under paragraph (e)(2) or (3) of this section.

If you consider the deferrals as excess annual additions, I think you get the same answer since they would have to be allocated to the participant's account to be an annual addition under 1.415©-1(b) and you are counting contributions made for Key Employees under 1.416-1, M-7.

Compensation for the Key is zero, so when you divide the contribution by zero, you get infinity, which is larger than 3%.

Any other opinions?

[Tom Poje]

I think it is a debatable issue. In the case of a partner the deferral election is suppose to be in place before the end of the year. so let's say they put down 10%. end of year comes, it is determined they have no comp, so no deferrals.
however, the IRS has no problems with deferrals being made throughout the year.

the preamble to the 401k regs had the floowining note

One commentator asked for clarification of the interaction between these timing
rules and the rule under the regulations that treats a self-employed individual’s earned
income as being currently available on the last day of the individual’s taxable year and
whether this last day rule precludes a partner from making elective contributions during the
year through a reduction in the partner’s draw. The restriction on the timing of contributions
is not intended to prevent a partner from deferring amounts that are paid to the partner
throughout the year on account of services performed by the partner during the year, and
the final regulations have been modified to clarify this point. However, self-employed
individuals who take advantage of this opportunity to defer amounts during the year must
make sure that the amount contributed during the year will not exceed the limits (such as
the limits of section 415) that will apply to the individual, based on the individual’s actual
earned income for the relevant period.

so, if the person had waited until the end of the year to determine the comp, and found there was none there would have been no deferrals. just because they 'took a chance' to defer during the year and then found out they had no comp, seems out to be a 'penalty' and say the plan has to provide top heavy.

I myself lean toward saying no deferrals because the person wasn't entitled to make any deferrals, so no top heavy. this is different, than, say, ee deferred 10,000 and comp at end of year turns out to be 5000 so there is a 415 violation.

but as far as I know, the IRS hasn't addressed the issue. the preamble simply doesn't address the issue entirely.

even under EPCRS when there is a 415 violation, the deferrals are returned to the participant. but in this case, as far as I know, such deferrals are not returned to the participant because he wasn't entitled to them in the first place.