TH - Related Rollovers

[JackS]

An employer sponsored a 401k plan long ago - pre 2010.  They terminated the plan and everyone was distributed.  The employer then started a Simple IRA and has been using that ever since.  They have discontinued the Simple IRA and want to start a 401k again for 2019 (traditional 401k, non safe harbor).  The new plan would be treated a NOT Top-Heavy because all the distributions were more than 5 years ago.  The owner wants to rollover money from an IRA that contains the original distribution from the prior QUALIFIED plan (not the Simple IRA money - I don't think there is any question that should be excluded from the TH calc).  Would doing this make the plan TH immediately (assuming his account is more than 60% of the EOY account balances)?  It seems it would be a related rollover and by putting it back into a plan sponsored by the same employer, it would have to be counted in the TH calculation.  Does this sound correct?  Am I missing something important here?  

 

[ETA Consulting LLC]

Nope.  Nope. Not related.  Nope. No way.  The top heavy determination date would be the last day of the first plan year and would not include the rollover.

Good Luck!

[Luke Bailey]

JackS, you probably skate out because the SIMPLE IRA is not a "plan" under 1.416-1, Q&A G-1. Otherwise, it would seem to me that the mere passage of time would not prevent the rollover from being "related" under 1.416-1, Q&A T-32, second parenthetical phrase of first sentence, which is presumably the rule you were concerned with.

[JackS]

ETA you seem very sure.  What is your reasoning or this? 

Clarified my question - the Simple IRA money is excluded but the 401k money from 20 or so years ago is the question.

[Mike Preston]

Every bone in my body agrees with ETA.  Have you read the definition of a related rollover?

[JackS]

57 minutes ago, Mike Preston said:

Every bone in my body agrees with ETA.  Have you read the definition of a related rollover?

I thought I had, I'll try again. 

 

[Mike Preston]

Let's restate the issue more precisely: Are monies rolled over from Plan A of Employer B to an IRA and then subsequently rolled over from that IRA to Plan B of Employer B treated as related or unrelated under T-32 of 1.416-1?

I say unrelated because the second rollover is not "made to a plan maintained by the SAME EMPLOYER". That is, with respect to the rollover there is a plan from which the rollover is made and there is a plan to which the rollover is made.  Both plans must be maintained by the same employer.  SInce the IRA is not a plan maintained by AN employer it can never be a plan maintained by the SAME employer.  Therefore, the rollover is unrelated.

The only way it could potentially be treated as a related rollover is if the IRS asserts that the rollover to an IRA was a subterfuge of some sort, such as invoking a portion of the step transaction rules.  In the situation you described I just don't see that happening.

The only way to be absolutely sure would be to go the PLR route.  Good luck with that. 

[JackS]

T-32 Q. How are rollovers and plan-to-plan transfers treated in testing whether a plan is top-heavy?

A. The rules for handling rollovers and transfers depend upon whether they are

unrelated (both initiated by the employee and made from a plan maintained by one employer to a plan maintained by another employer)

 or

related (a rollover or transfer either not initiated by the employee or made to a plan maintained by the same employer).

The rest of this section seems irrelevant to the current discussion

So a distribution from a plan initiated by an employee cannot be considered a related rollover - it would only be subject to the 5 year in-svc lookback UNLESS
416(g)(3) Distributions during last year before determination date taken into account

(A) In general For purposes of determining—

(i)the present value of the cumulative accrued benefit for any employee, or

(ii) the amount of the account of any employee,

such present value or amount shall be increased by the aggregate distributions made with respect to such employee under the plan during the 1-year period ending on the determination date. The preceding sentence shall also apply to distributions under a terminated plan which if it had not been terminated would have been required to be included in an aggregation group.

So if a distribution is a result of a plan termination, you only look back 5 years unless the rollover was not participant initiated or was DIRECTLY rollover over by the participant from one plan of an employer to another. 

 

(B) 5-year period in case of in-service distribution

In the case of any distribution made for a reason other than severance from employment, death, or disability, subparagraph (A) shall be applied by substituting “5-year period” for “1-year period

 

So if a Key employee was eligible for an in-svc distribution and rolled their money over to an IRA or a plan sponsored by an unrelated employer - the employer would count that in it's TH calc as an in-svc dist for 5 years but even if they then rolled it back into the plan it would be NOT be considered a related rollover.

 

I am sure I am missing something here but I'll have to figure that out later.  Thanks for the input, I really appreciate it.

[Luke Bailey]

From this and prior exchanges dealing with Q&A T-32, I think it's safe to say that reg writer did not conceive of every possible path that money coming out of one plan might take, and how long it might take, to get back into a plan of the same employer. I would read the IRS's rule literally. In this case, seems there is a good argument that the money's sojourn in the IRA takes it out of the category of a related rollover, but depending on the facts of an actual case, chiefly the length of the sojourn, that may or may not seem to make sense from a policy perspective.