Course 6 Top Heavy Plans and Key Employees

Question 1

What defines a key employee?

Answer 1

Owns more than 5%, or owns more than 1% and makes $150,000, or is an officer.

Question 2

What is the top heavy ratio?

Answer 2

Key employee account balances/all account balances must be <60% to pass.

Question 3

What is the determination date?

Answer 3

The last day of the preceding plan year.

Question 4

When is the top heavy ratio calculated?

Answer 4

On the determination date.

Question 5

What is the testing period for determining if an employee is a key employee?

Answer 5

Plan year that includes the determination date; for a new plan, it is the first day of the plan year.

Question 6

What is the maximum number of officers that can be key employees?

Answer 6

The greater of 10% or 3 people, with a maximum of 50.

Question 7

What adjustments are made to calculate the top heavy ratio?

Answer 7

1. Only contributions made by the determination date are included. 2. Catch up contributions are included. 3. Distributions made during the testing period are included. 4. If a distribution was taken for reasons other than severance, death, or disability, it is added back after 5 years. 5. Corrective distributions are added back. 6. Rollovers are not included. 7. Former employees are counted only if they provided services during the testing period. 8. Former key employees are not included.

Question 8

How is the account balance for the top heavy test calculated?

Answer 8

Account balance - term participants with no services during testing period - former key employees - rollovers + distributions within 1 year of testing period + in service distributions within last 5 years.

Question 9

What are the top heavy minimum allocation rules?

Answer 9

Minimum allocation is the lesser of 3% compensation or the highest allocation for any key employee.

Question 10

What does a top heavy allocation include?

Answer 10

Employer allocations and forfeitures.

Question 11

Who is entitled to a top heavy minimum allocation?

Answer 11

Non-key employees who are eligible for the plan at any point in the year, not limited participants.

Question 12

What is a limited participant?

Answer 12

Can rollover their money, but is not eligible for deferrals or any contribution.

Question 13

Is there an hour requirement for a top heavy minimum allocation?

Answer 13

No, not allowed.

Question 14

What compensation is used for determining the minimum allocation?

Answer 14

415 compensation from the entire year.

Question 15

What are the allocation methods for top heavy minimum allocation?

Answer 15

1. Formula method - guarantees an allocation for each non-key employee that is no less than the top heavy minimum allocation. 2. Contribution method - designed without regard to the top heavy requirement, with additional contributions to satisfy the minimum allocation.

Question 16

When would a plan use the contribution method for top heavy minimum allocation?

Answer 16

If they have matching, QNEC, QMAC, and 401k plans.

Question 17

What are the steps for calculating top heavy minimum allocation?

Answer 17

1. Determine the highest key employee allocation rate for the current plan year. 2. Determine the non-key employee minimum allocation rate based on the key employee allocation rate. 3. Determine all eligible employees. 4. Review the plan document for how the top heavy minimum is provided. 5. Determine the current allocation rate for eligible employees. 6. Determine the additional top heavy contribution for the eligible participants.