In 2001, a participant took an in-service distribution. In 2002, the same participant was terminated and took a full distribution in that year. Should the in-service distribution be added back in for the December 31, 2003, top-heavy determination?

No. Because the participant did not work for the employer in 2003, the 2001 in-service distribution is not added back into the top-heavy determination. The top-heavy rules exclude participants who have had no earned income during the year containing the determination date. However, had the participant continued to work into 2003 before being terminated, then the in-service distribution made in 2001 would be added back in for the December 31, 2003 determination.

Another participant in the same plan terminated employment and received a distribution due to the termination in 2003. The person was rehired several months later, but still in the same year. Should the termination distribution the participant received be added back in for the December 31, 2003, top-heavy determination?

The IRS Regulations state that all distributions made in the five-year lookback period — other than those made for severance from employment, death, or disability — are to be added back to the account balance as of the determination date. Since this was a distribution due to severance from employment, the amount would ordinarily not be added back to the account balance on the determination date. (The fact that the employee was rehired did not change the distribution reason. It was still a distribution due to severance from employment.) However, since the determination date fell within one year of the date of distribution, the amount should be added back in. Note: Employers must be careful to comply with the restrictive distribution rules for 401(k) plans. A severance from employment that is not bona fide will result in possible plan disqualification and penalties.