A defined benefit plan had a top-heavy ratio of 62% as of 8/31/03. The plan terminated during the 8/31/04 Plan Year and top-heavy minimums were provided. A 401(k) plan was established in 2004 with a calendar plan year. Two employees, who had not received any benefits under the DB, since they had not met eligibility, were allowed to participate early in the 401(k) by the client. The client wanted to keep them in the plan and amended the 401(k) plan to allow the early participation.

For the first year of the 401(k) the employer only intended to allow employee deferrals. Would these two employees be entitled to a top-heavy minimum in the 401(k) based on the DB ratio of 62% as of 8/31/03 or could the 8/31/03 DB values be combined with the 12/31/04 401(k) values for determining the top heavy status? The second option decreases the ratio to less than 60%

The answer is neither. When determining the TH ratio for plans with different plan years, you aggregate the determination dates that fall within the same calendar year. So in trying to determine if the 401(k) plan is TH for 2004, it's determination date is 12/31/2004, being it's in its first year. Therefore, you are going to use the 8/31/2004 values for the DB plan. If the assets had been distributed by then, well then you have the addback of distributions within the lookback period.

As an aside, I understand there are arguments over whether the addback of distributions under a plan termination should go back 1 year or 5 years. I haven't looked into it though as to how the IRS is leaning. That won't affect you this year or next, but in the future you will have to have an answer.