Required top heavy aggregation if newly promoted key's account balance

[KJohnson]

Law Firm has two plans: one for partners and staff (top heavy) and one for associates (not top heavy and in which no offfiers or owners are eligible to defer or receive allocations). The two plans pass coverage separately and it would appear that they are not in a required aggregation group.

However, what happens when an associate become a partner and either immeditately or eventually becomes a key employee? They are no longer an active participant in the associate's plan but are immediately in the partners and staff Plan. However, the required aggregation group is a Plan in which a key participates in the plan year containing the DD or any of the four preceding Plan Years.

1) Would aggregation be required even though new partner was not a key in the preceding 4 Years in which he or she participated in the associates' plan?

2) If the new partner's prior account balance remained in the associate's plan (although no further contibutions were made) would aggregation be required because the key would be a "participant" in both plans by virute of the account balance remaining in the associates' plan?

3) Would a plan to plan transfer between the plans immediately upon a participant becoming a partner solve the problem because of 1.416-1 T-32?

[Guest Hans Moleman]

Although this doesn't affect your situation, I believe the required aggregation group is if a key employee participates in both plans of the employer in the plan year in question. I know of no rule that says you include the 4 years prior to the determination date.

That being said, my read on the situation is that the only way out of having a key employee participate in both plans would be to transfer the balance instantaneously upon a person becoming a key employee. I believe the argument that a the person never participated in the first plan while a key employee would hold. Short of that, there is a required aggregation group.

[KJohnson]

Thanks Hans,

As to the first point, 1.416-1 Q&A T-6 provides that "For purposes of determining whether the plans of an employer are top-heavy for a particular plan year, the required aggregation group includes each plan of the employer in which a key employee participates in the plan year containing the determination date, or any of the four precedeing plan years."

I am inclined to agree with you on the second point or at least believe that it would be a very defensible position that there is no required aggregation if there has been a plan to plan transfer.

[Guest Hans Moleman]

You are correct on that point. I can honestly say I learned something today.

[Guest 1950]

I would suggest you carefully consider the eligibility features of each of the two plans. From time to time a partner -- even one with enough interest and income to be a key-employee -- ceases to be a partner, yet remains an employee of the law firm. If that change in status results in his becoming eligible for the associates' plan while he still has the lingering characterization of a "key employee", he will trigger required aggregation. It might be better to provide that anyone who has ever been a partner is ineligible for the associates plan.

[KJohnson]

Good point 1950, I should be able to "design around" that possibility.

[Guest 1950]

Thanks. Yep, easy to dodge, I think.

By the way: WRT question 2 in your original post, in MHO I think your worry is valid. That is: leaving the balance in the associates plan -- even if the participant is now ineligible for futher accrued benefits in that plan -- may be enough for the new partner to remain a "participant" in the associates plan for this purpose. Note that even termination of employment or death does not prevent the account balance of a key employee from continuing to count (on the bad side) in the determination of whether the plan is top-heavy. That suggests just having a balance is enough to be a participant. No slam dunk for the IRS, but gives them something to fight with. Agree with you the safer course is to move the money and rely on T32.