Top Heavy Contribution Date

[FishOn]

Have a plan that was top-heavy at 12/31/22 (62%).  From my understanding the plan is top-heavy for 2023.  The prior service provider calculate TH minimum contribution for the sponsor based on 2022 census/contributions but told them it would need to be deposited by March 15, 2024.  Wouldn't the top heavy minimum be based on the 2023 census/contributions instead of 2022 census/contributions?

[Lou S.]

Something sounds off.

But assuming (and possible a faulty assumption on my part) that this is a calendar year plan, that the plan was not TH in the past and that 12/31/2022 determination date is the first time they are TH then yes the 2023 TH minimum will be due in 2024 based on 2023 data. If they want to deduct it for 2023 it would be the due date of the 2023 tax return, with extensions.  If they wanted to push it out to the latest date allowed in the regs then that would be 12/31/2024 and you can have deduction and 415 fun with the timing.

[John Feldt ERPA CPC QPA]

I agree with 12/31/2024, but where is that deadline in the regs?

[Lou S.]

23 minutes ago, John Feldt ERPA CPC QPA said:

I agree with 12/31/2024, but where is that deadline in the regs?

Excellent question. It's one of those things I've heard "within 12 months of the end of the Plan Year" but I'm not sure where that authority comes from as I don't see it spelled out in the Code or Regs but maybe I'm missing it. Possibly some other IRS guidance? It's one of those things I'm confident in but can't seem to point to the correct citation.

[John Feldt ERPA CPC QPA]

Okay. Then I’m confident there is no deadline spelled out. But, using a deadline of 12 months after the end of the year as the latest “deadline” is probably a good practice, or using a deadline that is no later than 30 days after the tax return deadline (to count 415 limit purposes) is perhaps a better practice? And allocating after 12 months maybe should include missed earnings. 

[Peter Gulia]

If an employer waits a few months to pay the contribution needed to meet the top-heavy minimum allocations, what is due to a participant who was a non-key employee at the relevant time who before the plan-wide top-heavy contribution has been paid severs from employment, is entitled to take a single-sum distribution of her whole account, and claims it?

Must or should the employer “top up” such a participant’s account so it will have had its top-heavy minimum allocation before the participant exits the plan?

If an employer does not do that, must or should the employer and administrator later credit the individual’s account with a “trailing” top-heavy minimum allocation?

[CuseFan]

Yes, Peter, if the person was entitled to the TH allocation but took a distribution before such was deposited, that contribution must still be deposited and, to the extent vested, distributed. Same as any ordinary profit sharing - employer declares PS of X% of pay for all eligible participants employed at year-end, but doesn't deposit until 9/15 extended tax return due date. I terminate that March and take my vested balance (cash basis). Come 9/15 deposit, I need to get my X%. Can the employer make earlier deposits for participants getting distributions? Maybe, and doing so could alleviate tracking and paying these people two distributions, but then that must be tracked. Also, earlier access to that contribution may be a BRF subject to nondiscrimination.