Top heavy

[Belgarath]

Interesting situation - self employed individual makes deferrals based on a "draw" during the year, then discovers after end of year that earned income is zero. So deferrals have to be refunded as an excess.

Now, in a more "normal" situation, where there is, say, an ADP failure, I know the IRS position is that those deferrals count toward determining allocation rate to the Key, even though they are subsequently refunded. However, it seems a stretch to apply this to someone who is ultimately determined to have zero compensation, so I'd argue that no top heavy minimum would be due for the NHC's.

Any other thoughts/opinions? 

[Tom Poje]

I'd agree. he was ineligible to make deferrals in the first place, which is different than failing an ADP test

in fact, since he had 'no comp', if he was the only HCE, you wouldn't even have an ADP test under the 'hypothetical'.  If you have no comp, don't include on the ADP test rule. And if you have no comp/no deferral, I don't see how there is anything to apply under the top heavy rules.

(This is different than those scenarios "I don't want to put in top heavy, just return my deferrals" that some Key employees wish to use)

[Belgarath]

Thanks Tom.