Top Heavy Minimum Funding for Terminating Plan?

[Guest Kennedy]

If a top heavy money purchase pension plan terminates mid-year, is the plan sponsor still responsible for top heavy minimum funding for the short plan year of termination? Does the answer change for a 401(k)plan? Any citations would be appreciated. Thanks.

[Guest Mr. X]

A participant must be employed on the last day of the plan year to be required to receive a top heavy minimum allocation. This is a defined contribution plan requirement (a.k.a. no difference for a 401(k). Because the plan terminated before the last day of the plan year, no top heavy minimum is required in your case. Consult IRC 416 for details.

[Guest Kennedy]

I know that you are probably going to tell me that this doesn't matter, but I have a hard time swallowing this kind of loophole in the top heavy regs. A plan sponsor can escape his liability by terminating the plan? It's too easy. It just doesn't seem consistant with IRS goals. The final 5500 for a terminating plan likely shows the plan year ending on the date of plan termination. Couldn't the date of a mid-year termination be interpreted as the last day of the plan year?

[Guest Mr. X]

A benefit formula can always be reduced, whether that be by plan amendment or by plan termination, before the benefit is accrued. Because of the last day requirement associated with a top heavy minimum allocation, the participants do not accrue that benefit until the last day of the plan year. This is the same with the normal plan benefit formula so I do not consider it a loophole at all.

The final 5500 shows the date the assets were fully distributed and would never be confused for the date of termination.

[Guest Kennedy]

You are 100% correct. 416-1, T-4 is very clear on this issue. It must be the bleeding-heart in me that can't accept an evil plan sponsor successfully avoiding payment of top heavy minimums to his/her virtuous, hard-working employees by taking away their retirement plan.

[Richard Anderson]

I see T-4 as saying that in years after the termination no further accruals are required. But, in the year of the termination, I think that the top heavy contribution, or any other contribution that has accrued at the time of the termination, must be paid. Also, I don't follow the logic that a person is not employed on the last day, since the plan terminated.

[Guest Mr. X]

Richard, semantically you are correct. The person would still be employed on the last day of the plan year if he was employed on the last day of the plan year (I feel like Yogi Berra). However, I think you realize that if the plan terminates before the last day of the plan year (204(h) notice notwithstanding) and there is a last day requirement to accrue the contribution, then the participants would not accrue the contribution.

[david rigby]

Speaking of semantics, the original question asked about "top heavy minimum funding". Let's be clear, that top heavy is about minimum benefits (and vesting), not about funding.

BTW, for most top heavy plans, the ultimate benefit (at normal retirment date) exceeds the projected top heavy minimum benefit, thus having no impact on funding.