3795. When is a single plan top-heavy?Nuco Employeercline202014-08-17T14:59:00Z2014-08-17T14:59:00Z37584321Summit Business Media3610506914 key employee2005-01-18T00:00:00ZTaxFactsDefaultArticleSite Map/Retirement Plans/Quick Clicks/Top HeavySite Map/Retirement Plans/Pension And Profit Sharing/Qualification/Top-Heavy Plan Requirements116140352-00-tf1.xml354.00;#2256;#2286;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1When is a plan top-heavy?109300.000000000TaxFactsDefaultArticle2010-01-15T00:32:05ZSBMEDIA\moss-admin3795. When is a single plan top-heavy?Where an employer maintains only one qualified plan, that plan is a top-heavy plan with respect to a plan year if the present value of the cumulative accrued benefits under the plan, or the aggregate account balances if the plan is a defined contribution plan, for key employees (Q 3805) exceeds 60 percent of the present value of the cumulative accrued benefits under the plan, or the aggregate account balances, for all employees.IRC Sec. 416(g)(1)(A).For purposes of determining the present values of accrued benefits, or the sums of account balances, benefits derived from both employer contributions and nondeductible employee contributions are taken into account; benefits derived from deductible employee contributions are disregarded. Deductible employee contributions are certain contributions made before 1987; the term does not refer to salary reductions or employee deferrals. Any reasonable interest rate assumption may be used to calculate these present values, but the IRS automatically will accept as reasonable a rate that is not less than 5 percent or greater than 6 percent. The interest rate used need not be the same as other assumptions used in the plan (e.g., the rate assumed for funding purposes). Where an aggregation group consists of two or more defined benefit plans, the interest rate assumptions used to calculate the present values must be the same in all plans.Treas. Regs. §§1.416-1, T-26, 1.416-1, T-28.Present values and account balances generally are determined on the last day of the prior plan year, but when testing for top-heaviness with respect to the first plan year (as well as the second) of a new plan, the determination date is the last day of the first plan year.IRC Sec. 416(g)(4)(C).In the case of a defined contribution plan, the balance in each account on the determination date is calculated by adjusting the balance of each account as of the most recent valuation date occurring within twelve months prior to the determination date for contributions due as of the determination date.Treas. Reg. §1.416-1, T-24. For defined benefit plans, the present value of an accrued benefit as of the determination date generally is determined as of the most recent valuation date occurring in the previous twelve months. Special rules apply in the case of a new defined benefit plan in its first and second plan years.Treas. Reg. §1.416-1, T-25. The cumulative accrued benefit of non-key employees must be determined under the method used for accrual purposes for all plans of the employer or, if there is no such method, as if such benefit accrued not more rapidly than under the fractional method (Q 3650).IRC Sec. 416(g)(4)(F).In determining these present values and account balances, any distribution (generally including death benefits) made from the plan with respect to any employee during the one-year period ending on the determination date, and that is not already reflected in the present value or account balance, must be added back to the present value of that employee’s accrued benefit or to his or her account balance, whichever is applicable.IRC Sec. 416(g)(3)(A); Treas. Reg. §1.416-1, T-30, T-31. In the case of a distribution made for a reason other than severance from employment, death, or disability, a five-year look-back period applies for this purpose.IRC Sec. 416(g)(3)(B).If an individual has not performed any services for his or her employer during the one-year period ending on the determination date, the individual’s accrued benefit and account are not to be taken into account for purposes of determining whether the plan is top-heavy.IRC Sec. 416(g)(4)(E). If an individual was a key employee in a previous plan year but currently is a non-key employee for purposes of the top-heavy test, the individual’s cumulative accrued benefit (or account balance) is totally disregarded.The terms “key employee” (Q 3805) and “employee” should be read to include their beneficiaries, so that the beneficiary of a key employee is treated as a key employee and the beneficiary of a former key employee is treated as a former key employee.IRC Sec. 416(i)(5); Treas. Reg. §1.416-1, T-12. This apparently means that for purposes of testing top-heaviness, an individual’s accrued benefit or account balance must be considered in its entirety and not allocated between the individual and his or her beneficiaries. For plan years beginning before January 1, 2002, it also meant that the accrued benefit or account balance of a deceased key employee, even though payable (or paid) to his or her beneficiary, was treated as that of a key employee for four years.See IRC Sec. 416(i)(1)(A), prior to amendment by EGTRRA 2001.A plan will not be treated as violating the top-heavy rules merely on account of the making of, or the right to make, catch-up contributions (Q 3688) by participants age fifty or over, under the provisions of IRC Section 414(v), so long as a universal availability requirement is met.IRC Sec. 414(v)(3)(B).