Top Heavy Plan

2020 plan year is top heavy. Client is discretionary SHNE but cannot afford to fund SHNE or the top heavy minimum. Can the key employees withdraw all of their 2020 contributions (with earnings) in order to bypass the top heavy minimum contribution? I'm thinking this is a big no-no, but would like some proof. If any responses could have some regs pasted in, that would be fantastic.

Well, it's tax fraud and I'm not sure there's a specific reg that says "don't commit tax fraud" anywhere. It isn't an approved corrective fix for a top heavy plan.

Technically no one is eligible for the top heavy minimum yet because they aren't employed at the end of the year (assuming a 12/31 year end). So, one solution is to terminate a bunch of employees.

Another is that the contribution (whatever amount it is) doesn't have to be deposited until 12/31/2021, though earlier for deduction purposes.

Not a lot of great fixes here.

Assuming the key-employees are eligible for an in-service distribution they could withdrawal their funds from the Plan, but the look back on in-service distributions being added back in for top-heavy is 5 years so if it was done in 2020 assuming this is a calendar year plan then you would be adding it back in to the determination dates of 12/31/2020 (for 2021 plan year determination), ..., 12/31/2024 (for 2025 determination) and it would be gone for the 12/31/2025 determination date for 2026.

Also for unless this is a brand new plan where the determination date is 12/31/2020 for 2020, you already determined the Plan was Top-heavy for 2020 based on the 12/31/2019 balances so no matter what you do in 2020, the plan is going  to be top-heavy for 2020 as you already determined it.

Other than that I'll echo Bill Presson's response above which as usual seems on point.

1 hour ago, nerd-party-administrator said:

2020 plan year is top heavy. Client is discretionary SHNE but cannot afford to fund SHNE or the top heavy minimum. Can the key employees withdraw all of their 2020 contributions (with earnings) in order to bypass the top heavy minimum contribution? I'm thinking this is a big no-no, but would like some proof. If any responses could have some regs pasted in, that would be fantastic.

Even if they could do that, they are still on the hook for the SH contribution.

2 minutes ago, BG5150 said:

Even if they could do that, they are still on the hook for the SH contribution.

He said "discretionary" so I assumed they did a maybe notice for 2020, but that might be a bad assumption on my part.

One "trick" I have used in the past, if your keys are >50 years old, is to set a maximum deferral limit of $0 for key employees. Then their contributions (up to the catch-up limit) will be automatically reclassified as catch-up, and since catch-up is disregarded for top heavy purposes, it doesn't trigger the top heavy minimum.

However, I don't think you could add this limit mid-year without it being a 411(d)(6) problem. Maybe you could get away with it if none of the keys have contributed more than the catch-up limit year to date.

33 minutes ago, Lou S. said:

He said "discretionary" so I assumed they did a maybe notice for 2020, but that might be a bad assumption on my part.

Oops.  I missed that