top heavy - ownership

[JKW]

I have a question for top heavy determination. I have a plan in which an owner gave up ownership as of 12/31/14. So when using the 12/31/14 balances to determine the 2015 top heavy, he is still being included. Is this correct?

[Tom Poje]

If an employee’s ownership interest changes during the plan year, his ownership interest for the year is the largest interest owned at any time during the year.

Treas. Reg. § 1.416-1 T-19 (b) (This is from the old ‘top ten owner rules’ no longer used to determine key employees under the simplified rules by EGTRRA)

[JKW]

Ok- so because he had earned income and was an owner until 12/31/2014 - he is still a key as of 12/31/14 so his balance is included in the top heavy test in determining 2015. Right? In one of the examples I see that it states he is key for 4 years? So is he counted for the next 4 years? He has income still just not an owner.

[Tom Poje]

if you are with Mr. Peabody and use the WABAC machine and are referring to plan years pre-2002 you are correct, you used to use the determination year and prior 4 years.

this was simplified and amended years ago to only use 1 year, but the Q and As in the regs were never 'updated' so many of them still use the '5 year rule' instead of the 1 year rule

so for example on the Relius software if you have a pre 2002 plan year a person could be categorized as "key 4 plan years ago, not last 3 years" [or 3 plan years ago, or 2 plan years ago, etc)

while anything after that date only has the possibility of "key last year", "not key last year" or 'former key"

so in your case he will become a 'former key employee' and, though eligible for top heavy, his balance will not be included in testing.

as to how you treat him in 2015 see comments from a post a few weeks ago

http://benefitslink.com/boards/index.php/topic/58685-key-employee-determination/