NU Online News Service, Feb. 25, 2004, 6:14 p.m. EST – Employers that take some 401(k) contributions back from employees who leave early could end up with top-heavy plans.[@@]
The Internal Revenue Service comes to that conclusion in Revenue Ruling 2004-13, a document that analyzes the effects of a 2-year-old part of the Internal Revenue Code, Section 416(g)(4)(H), on the rules governing certain types of contributions to 401(k) plans.
The ruling describes an employer that has the discretion, or freedom, to make “nonelective” contributions to employees’ 401(k) plan accounts whenever it chooses to do so. The term “nonelective contribution” refers, in this case, to employer contributions other than matching contributions.
The IRS discusses a case in which the plan sponsor actually makes nonelective plan contributions.
The IRS also discusses an otherwise identical case in which employees forfeit some or all of the nonelective contribution if they leave before a 5-year vesting period ends, and it discusses a third case in which employees can begin making 401(k) plan contributions as soon as they start working but cannot receive matching contributions until they have completed 1 year of service.
In all 3 cases, the plans “do not meet the requirements of Section 416(g)(4)(H) and are therefore subject to the top-heavy rules in Section 416,” according to Roger Kuehnle, the IRS employment plans official who is listed as the principal author of the ruling.
The new section of the Internal Revenue Code, Section 416(g)(4)(H), was included in the Economic Growth and Tax Relief Reconciliation Act of 2001. It began taking effect Jan. 1, 2002.