Fixing missed top-heavy contributions: OK to retroactively contribute

[Hoard1]

Employer failed to make Top Heavy COntributins for 96-99 (Insurance Company Turnkey Arrangement). Adoption Agreement sates that Top Heavy Contribution must be made for all Participants (both key and non-key). As part of self correction could the employer only make the contribution for the non-key? Alternatively, could all of the owners (5% or more) make an election not to receive the TH contribution? Any guidance available?

[Guest]

1. I am not sure if you can even self correct at this point, if you are going back to 1996, the fact that the error effects all participants, etc.

2. is the plan a 401(k)? I would assume yes, otherwise how could they have missed the top heavy, it would be covered in the contribution. For example, I believe Corbel's documents, while not excluding keys from top heavy minimums, are worded something like ...in determining whether a non-key employee has received the required minimum, deferrals and matches are not taken into consideration. The Pension Answer book gives a similar type definition.

so if keys deferred, it looks like you could count their deferrals toward satisfying top heavy.

3. if it possible that if you alloacte a top heavy minimum in 1996, the plan might not be top heavy in a future year(s)?

4. if I remember my rules correctly, your make up top heavy contribution will be made and deducted in 1999 or 2000. therefore, even though it is for a prior year, it counts as an annual addition for the year deducted. if you missed 4 years, then 4* 3% = 12%. ugh. you may have issues with 415 and 15% deductibility as well. I am not sure what happens at that point on make up contributions.

5. if 401(k), then in 1996 you use comp - deferrals in determining top heavy minimum, unless document specifies otherwise...or my brain seems to recall that was the rule in 1996.

6. again, if 401(k) and not a prototype, can you use match to satisfy top heavy???? you have to be careful doing that,

but it is a possibility.

oh well, those are some thoughts and ideas...

[Hoard1]

Addtional Questions?

First Year was a short year 10/01 to 12/31 is comp limit prorated for that period? For purposes of 415 comp for top heavy contributions for non-keys is compensation for full 12 months or just from 10/01 to 12/31? Limitation year in document is calandar year.

Thanks

[Guest]

I am pretty sure you are stuck with full year comp.

[Hoard1]

My reaseach has come up with the following:

1.1.401(a)(17)-1(B)(3)(iii)(A). 401(a)(17) Comp must be prorated for short Plan Year.

2.415 Compensation (used to base TH Minimum Benefits)is based on full limitation year. 1.415-2(d)(4).

There were some threads I saw that gave different answers to these questions.

Does anyone have any other throughts?

[Guest]

at the 1998 ASPA conference, Kevin Donavan gave a talk on short plan years. according to the documentation [workshop #11, if you have the 1998 ASPA notes]

"An initial short plan year does not create an initial short limitation year even when the plan year and the limitation year otherwise coincide....

the only mention in the regulations of pro-rating the 415© dollar limitation is in connection with a change in the limitation year...

This was confirmed by the IRS at ASPA's 1996 Annual Conference (Q & A #84)

Question: If there is a short INITIAL plan year, and the plan sponsor has only been in existence for that same period of time, in that special situation is it possible to have a short INITIAL plan year?

Answer: There is no initial short limitation year. The limitation year is the full 12 month period working backward from the end of the plan year."

thus, since the original note said comp was based on the limitation year, I would say you have to use 12 months of comp.

(that's the best I can do for you. Pensions take too much research to find this stuff. I remember going to the talk, so I knew where to look for the notes!)

[Hoard1]

Facts for Summary:

Plan Effective: 10/01/96

Compensation Definition Plan Year 10/01 to 12/31

Limitation Year: Calandar Year 1/01 to 12/31

417 Limitation 150000 *3/12 = 37500

$$$ Limit = 30,000 because limitation year is full year

415 Comp for 416 Top Heavy Required Contribution = full 12 months of comp (1/01 to 12/31) because limitation year is full year.

Thanks to all who helped on this issue.

[Guest JAREL]

Sorry, but I disagree with something stated above. The correction to the Top Heavy is considered an annual addition for the year to which it relates, not when deducted. So, the 415 limit might not be an issue. The 404 deduction limit may be an issue since the corrected contributions are included in the deduction limit for the year contributed. You can, however, exclude make-up investment return from the Top Heavy contribution for deduction purposes. Sorry I can't give any citations off the top of my head, but I have been through this several times and it's sometimes too painful to revisit.

[Richard Anderson]

Concerning whether the correction can exclude the keys:

One of the general guidelines for correction (self correction or otherwise) is that the plan must be put in the same position as if the failure had not occurred. That would require that the keys receive the top heavy contribution.

When submitting thru EPCRS you could propose that only non-keys receive the contribution as the correction.