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Top Heavy PROBLEM solution sought

Author	Comment
jmwilson57	Top Heavy PROBLEM solution sought	Lead	[-]
Posts: 2 (03/13/08 10:02:47) Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	PROBLEM: A 30 employee company (blue collar, low paid workers) with just 2 key (and HCE) owners JUST started a "regular 401K" on Oct 2007 -- with no match. This was not a Safe Harbor design -- just a 'basic 401K". The "bundled" provider (a large 401K provider, specializing in 'start up plans' who handled everything) told this firm that IF they 'over fed' their new plan with excess contributions, that they could FIX this problem "prior to filing their corporate tax returns". This company was ADAMANT that they DID NOT WANT to pay any matching contributions. But now, as of Feb '08, it was just revealed to the owners that they failed their 2007 Top Heavy test -- because they HAVE over-contributed -- according to the Top Heavy rules -- and the fix is described as: "just CONTRIBUTE 3% of payroll (approx 19K) to cure this problem! Unlike the ADP rules (which allow for a complete 'no harm, no foul' cure), I understand that this $19K fix MUST be made, because the excess contributions were in the plan as of 12-31-07... and "this Top Heavy 'failure' can't ever be undone". QUESTIONS: 1. Is the plan provider liable for ANYTHING in their role as recordkeeper/plan administer? (Several independent TPAs told me that "with a quick glance at the census in Oct 2007, knowing that matching was not a goal, that they would never had allowed the HCEs to overdo their contributions") 2. If this small company 'does nothing' (including terminating the plan NOW)... what are the liabilities that they face going forward?
fender5150		#1	[-]
Posts: 36 (04/04/08 15:35:03) Contributing Member Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	You might want to get a 2nd opinion regarding the Top Heavy test. If you truly failed, start looking for creative funding options for the Non-Elective Contribution (NEC). Also: a Non-Elective Contribution may create some excitement about the plan, which will ultimately be good for the HCEs. Keep in mind, the plan isn't top-heavy for the year ended 12/31/07, it's Top-heavy for the year ended 12/31/08; so you have some time to fund the NEC and you have some time to strategize. Here's one possible solution, if your plan document allows cross-testing, you can give HCE's a higher contribution % and still satisfy top-heavy requirements. From the hip, I would think the plan administrator should feel a little responsible for creating a Top Heavy plan right out of the gate. Going forward, don't allow any HCE's to roll money into the plan. You are allowed to discriminate against HCE's in this way. Your non-HCE's out-number your HCE's by such a wide margin, the Top-Heavy problem should resolve itself pretty quickly if you are careful for the first year or two. All you need is a small handfull of employees to roll money into your plan. To re-iterate: allow new employees (who are non-HCEs) to roll money into the plan, but don't allow rollovers from HCEs. Just a thought. Regarding the plan termination. I would have to do some research to answer that question accurately. Hopefully there's someone out there who has dealt with this issue recently. Thanks, Fender www.401ktest.com
DCK101	Top Heavy Problem	#2	[-]
Posts: 364 (04/06/08 19:19:24) Elite Member Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	fender5150, You need to check your statements for accuracy before posting. First, this plan IS top heavy for the 2007 year. Per regulations, the top-heavy determination date for the first plan year is the last day of that year. In subsequent years, the determination date is the last day of the prior plan year. So the last day of the first plan year, is the top-heavy determination date for both the first and second plan years. Second, when performing the top-heavy test, most rollovers are excluded. The only ones that are included are rollovers form related plans, meaning it had to have been rolled from a plan of the same or a related employer. That is highly unlikely in this case. Third, the top-heavy test does not concern HCEs, it concerns the account balances of Key employees. They may sometimes be the same people (as in this case), but certainly not always, and to reference the terms incorrectly is irresponsible, not unlike what got this plan in trouble in the first place. Sorry to be so harsh, but jeepers-creepers, you apparently represent "401ktest.com", if that's a business, what the heck kind of testing is going on there?
DCK101	Top Heavy Problem	#3	[-]
Posts: 365 (04/06/08 19:27:58) Elite Member Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	Personally, I think the broker or financial advisor who sold this plan is most accountable for this situation. A "stand-alone" 401(k) plan was the totally wrong plan for this employer. It was not the administration firm that made this choice. It was the "advisor" who responsible for guiding this employer and was compensated for the sale, who needs to work with this client to try to best resolve this situation. Too often, fingers are pointed at the wrong party.
fender5150		#4	[-]
Posts: 54 (06/07/08 12:00:53) Contributing Member Reply Quote More My Recent Posts Message Me Connection Blocking Invite Ignore User's Posts	DCK Thank you for your comments. I don't mind getting information, no matter what form it comes in. The bottom line is; jmwilson is getting some good feedback, and I may have learned something. I'm going to follow up on your comment about rollovers and the top heavy test. Regarding your first comment: "Top-heavy determination date for the first plan year is the last day of that year". I failed to take into account that this was the initial year of the plan. JM mentioned it, but I missed that detail when answering. So thank you again. I will be more careful with my comments. When you catch a mistake like this, please feel free to address it in what ever fashion you wish to. Second comment: "Most rollovers are excluded for the Top Heavy test". If this is true, I have missed it. I plan to follow up on this one. I'm fortunate that the Top heavy test isn't a problem for my plans. JM, as DCK inferred, the HCE's need to put their money into something else. The simplest solution would be a non-qualified deferred comp plan, but that solution could create taxable income in the long run (as well as PHC issues in the long run). JM: You need the advice of a good TPA and a tax accountant to find an optimum solution. Third comment: I used the term 'HCE' because that's the term JM used. In this case the HCEs seem to also be the Key Employees: This is not usually the case. Your comment illustrates a point that I hope everyone understands: Some assumptions have to be made in order offer advice over a forum. In fact, we're offering ideas rather than advice. There's no way to offer truly accurate advice without having all the facts. DCK feels I was a little loose with the facts in this case, which is a fair comment. Your last question: "What the heck kind of testing is going on there?". Thank you for asking. 401ktest.com provides 3 services: 1. A secure portal to send payroll activity to your Administrator. 2. Automated ADP/ACP testing for companies with less than 200 employees - We don't provide an automated process for the Top Heavy test, or other tests that involve investment data. 3. Continuing education courses on beginner level 401k topics. We are looking for a SME who would be willing to write a course (or a series of courses) on Cross-Testing. We have developed a great following in the last year - We launched our website last June. We saw a need to provide an affordable test for small companies who don't get much attention from the 401k community. Our site is also used by small TPAs (who want and affordable alternative to Excel), and payroll processing companies (who want to provide an affordable interim testing solution to their clients). We're not a fortune 500 company, but we're doing well. In the last year, we've had two complaints. One from a company with 800 employees, and one with 6,000 employees. Ultimately; they were both able to run the test, but the drag-and-drop feature didn't work - This is one of my favorite features, but it's not designed for big companies. Incidentally; we are upgrading the test to include the alternative method for calculating averages (when doing the ADP/ACP test). We hope to launch before the end of the summer. Let me reiterate something: I appreciate your comments, especially regarding rollovers. One thing is certain: I don't know what I don't know. So thanks for the correction, assuming you are correct. I'm going to pour thru IRC 416 and see if I missed something. I also plan to check with my associates regarding (the provision you mentioned) and its practical application. Thanks, Fender www.401ktest.com

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