Top Heavy question

[drewmc2001]

I had a plan recently that failed Top Heavy testing. This is nothing new for the plan sponsors and they are used to making the 3% top heavy contribution.

The problem that I ran into, was that after allocating a 3% top heavy contribution to all eligible participants, I ran top heavy testing and they were still failing both the ratio percentage test (401a) and the average benefits test.

My question is this, does the plan need to do something beyond simply funding the 3% Top Heavy contribution to all eligible participants?

Thanks,

Andy

[Tom Poje]

I'd be curious on more details.

If you fail ratio %, even with a top heavy minimum, that implies less than 70% of the NHCEs benefit, which in turn implies more than 30% turnover, which means a partial termination.

(Unless you are talking a plan with very few NHCEs)

and yes, it is possible to have a plan that allocates top-heavy to all participants, not just non-key employees that could cause this to happen, but also means that the NHCE who quit all worked over 500 hours as well.

In such a case you would have to make a corrective amendment to provided a contribution to a few of the terminated ees, it would have to have substance (which means you couldn't simply make a contribution to a 0% vested employee, etc)

[drewmc2001]

Thanks for the response, Tom. There is only 1 HCE and a total of around 20 employees, including 7 new hires and 6 termed employees. I looked at the issue of a partial termination, but found that historically their routine termination exceeded 20% in most of the plan years that we have been the TPA. I looked at the IRS website regarding partial termination and it appears that "routine turnover" even if high isn't considered a partial termination.

Several of the terminating participants (NHCEs) worked in excess of 500 hours.

If any of this information would change your response, any update would be greatly appreciated.

Thanks!

Andy

[Tom Poje]

well, I guess if you have 20 ees, (1 HCE and 19 NHCEs) and all 6 NHCEs term > 500 hours you would have

13/19 = 68.4% which would indeed fail ratio. if even one of those term < 500 hours then you should be above 70%.

if document has fail safe language it would tell you who has to get a contribution (either last to quit or most hours)

if no fail safe language, I'd still be a bit surprised if plan fails avg ben pct test

tested on an allocation basis and imputing disparity should be enough to pass (unless the HCE has comp less than taxable wage base)

[Deaconmomma]

Tom,

If my top Heavy plan was tested using the Accrual Method last year, can I switch and test using the Allocation Method this year.

The plan fails using Accrual permitted disparity, but passes using allocation method. All eligible are receiving a top heaving minimum.

[My 2 cents]

Tom,

If my top Heavy plan was tested using the Accrual Method last year, can I switch and test using the Allocation Method this year.

The plan fails using Accrual permitted disparity, but passes using allocation method. All eligible are receiving a top heaving minimum.

Maybe I am not following what is being asked here. I think that, for top heavy testing (not for coverage or non-discrimination testing, but for 416 testing) defined benefit plans must be tested using present value of accrued benefits and defined contribution plans must be tested using account balances. Permitted disparity does not come into play. Now if you are asking about non-discrimination or coverage testing, to the extent that the extra top-heavy accruals or contributions are not sufficient to enable the non-discrimination or coverage tests to be passed, the fact that the plan is top heavy doesn't really matter. Am I missing the point?

[Tom Poje]

I'm guessing the following: plan is top heavy, but with a number of people that receive top heavy but not a full profit sharing contribution.

therefore, the plan passes coverage because enough people are benefitting, but you now have a plan that has 2 formulas, one at 3% and the other at x%. Therefore, it is treated just like you would a cross tested plan with 2 formulas.

There is no requirement that if you test on an accrual basis one year you have to test on accrual basis the following year. (unlike the ADP or ACP test for which the document must specify prior or current year)

I add one caveat to my statement - I have seen some documents that specify a particular mortality table and interest rate, so I suppose it is possible the document could specify that accrual testing will be used.