PS Plan - top heavy

[Belgarath]

I'm thinking about how to avoid top heavy status for the first year a contribution is made, and I think the following works in this one odd situation. Thoughts?

Suppose in 2016, you have an employer who wants to establish and start contributing to a plan for 2017.

Why can't the employer establish the plan as a PS only for 2016, effective 1/1/2016, with 401(k) deferrals/other contributions to be effective for 2017, and then just contribute zero for 2016?

So, the rules for the "first year" apply to 2016, but in reality they are immaterial, as no contribution is made or allocated or accrued.

When doing 2017 testing, the determination date is 12/31/2016, and the account balances are all a big fat zero, so the plan isn't top heavy for 2017. No top heavy contributions required until 2018.

Any holes in this thought process?

[RatherBeGolfing]

I'd say you are correct, the plan is not top heavy for 2017.

Playing devils advocate, could the IRS/DOL claim that you established the plan with no contribution in 2016 with the sole intent of avoiding the 2017 top heavy status? Not even sure if that is a winning argument for them though, there is no requirement that you make a contribution during the first year.

[Soundbc1]

It has been awhile since I looked, but for a plan to be qualified, under 401(a), doesn't it have to have a valid trust? Back in the day, early 80s and before, when a plan was set up the trustee would immediately put $100 in the plan to ensure there was a valid trust. Then in the late 80s, the IRS ruled that the deposit wasn't needed, the receivable contribution was enough to ensure the trust was valid.

So if no valid trust, no qualified plan for 2016, would be my opinion.

Now I haven't read all of 401(a) in a decade, so my memory could be wrong.

P.S. - Writing this I realize I have been in this business too long. Am I the only one that remembers, Excess Only plans for professionals?

[rcline46]

Excess only plans - yes. Pre DEFRA,TEFRA, REA. Pre Top Heavy, which is what really killed excess only plans.

[NJ Mike]

I remember them and yes, top heavy caused their demise.

[Soundbc1]

I am surprised that no one came back to correct me or agree with me regarding the trust issue.

As for the top heavy, I would say it differently, excess only plans brought in to existence top heavy rules, which is slightly different.

[Belgarath]

One might consider that a plan, established for a given year but no contributions are made, still requires filing of a 5500 form.

Granted that 5500 forms are ERISA and IRS qualification is a different issue...

[Bird]

I am surprised that no one came back to correct me or agree with me regarding the trust issue.

I agree with you.

[Belgarath]

Hi Bird - just to take this a little deeper - suppose a client establishes a PS plan - every intention of contributing, but things happen - cash flow crunch, whatever - so no contributions are made for the first two or three years. The plan excludes vesting service prior to the effective date of the plan.

Would you still assert that there is no plan for the prior years because it wasn't funded? Do you think the IRS would allow this interpretation?

I understand that 81-114 was meant to allow valid trust treatment for the purposes of deductibility of contributions made in subsequent year, but I don't see how they can invalidate a plan where no contributions are required, on the basis of the "no corpus" argument. I'd appreciate any further thoughts you may have on the issue.

I do understand the IRS can do anything it wants, and then you have to fight the decision...

[My 2 cents]

Wouldn't the effective date be the date stated in the plan document, irrespective of when contributions started being made? So if the plan were signed in 2014 effective as of January 1, 2014 but no contributions were actually made until 2017, wouldn't the participants have been accruing vesting service since 1/1/14?

Presumably, at the time the plan was established, the trust would also have been established, whether or not there were actual funds to invest? And wouldn't, in the example above, 5500 reporting been required for 2014, 2015 and 2016, notwithstanding there having been no assets?

[RatherBeGolfing]

Hi Bird - just to take this a little deeper - suppose a client establishes a PS plan - every intention of contributing, but things happen - cash flow crunch, whatever - so no contributions are made for the first two or three years. The plan excludes vesting service prior to the effective date of the plan.

Would you still assert that there is no plan for the prior years because it wasn't funded? Do you think the IRS would allow this interpretation?

I understand that 81-114 was meant to allow valid trust treatment for the purposes of deductibility of contributions made in subsequent year, but I don't see how they can invalidate a plan where no contributions are required, on the basis of the "no corpus" argument. I'd appreciate any further thoughts you may have on the issue.

I do understand the IRS can do anything it wants, and then you have to fight the decision...

To take that thought a step further, if you have eligible participants in 2016 but no contribution for whatever reason, the DOL/IRS would still expect a form 5500 right?

If a 5500 is required, I don't see how they can possibly say that the plan did not exist in 2016.

[Bird]

I guess it might come down to facts and circumstances. If you set up a plan on Dec 31, it seems unlikely that you wouldn't fund it. And keep in mind that if you don't make regular and recurring contributions to a PS plan it is considered to be terminated.

[John Feldt ERPA CPC QPA]

If in doubt, perhaps put in a enough dollars to remove your doubts. Give it to non-keys only, make sure the document allows the allocation.