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Participation waived - do they get Top Heavy contributon?


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A 401(k) Plan that is top heavy. The two owners are the only participants because their 3 other eligible employees have waived participation in the Plan prior to becoming eligible. Does the employer have to give them a top heavy contribution?

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Unless those other employees never worked more than 1,000 hours in a year, I don't see how the plan doesn't fail coverage each and every year. Remember, they may have waived participation, but they are still counted in 410(b) coverage testing as eligible, not benefiting.

Do the owners make 401(k) contributions? If so, how can the ADP test pass any given year?

[side note: did they irrevocably waive participation, or just chose not to make deferrals? If the former, something doesn't seem right. ]

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Sounds like you may have a disqualifying defect in your plan if any of those employees are non highly compensated and worked more than 1000 hours in any plan year.

Edit and to echo BG5150 -

If the irrevocably waived participation you have a coverage failure in every single year that anyone of them is eligible.

If they simply chose not to make 401(k) contributions, then they are eligible participants with a 0% contribution rate and as such would need to receive a top-heavy minimum.

If the plan is a safe harbor matching plan where deferral and match are the ONLY contributions and the employees all elected not to make 401(k) contributions (not irrevocably waive participant) then the plan is deemed not top-heavy and no TH minimum is required. But if they are making a PS contrib, then t he TH minimum would kick in.

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Maybe I am just a suspicious sort of person, but can it be conclusively proven that the participants who waived participation did so entirely of their own free will, with no pressure whatsoever exerted by the owners to do so? Sure seems odd that all of the non-owners went out of their way to stay out of the 401(k) plan. Why would they want to do that?

Of course, the smallest amount of "suggestion" from their employer that they do this is a huge, extreme violation of the employees' ERISA rights, deserving of the harshest possible penalties to the owners.

Always check with your actuary first!

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$0.02, that's just what I was thinking. It seems very suspicious that all three decided to say, "not only do I not want to put money into the plan, I never want to and also forgo any sort of employer money forever."

It COULD be an innocent error, that the owners game them waiver paperwork thinking it was the right form to give them.

Also, I have seem people waive rights to join a plan because of a faith that precludes them from entering into any transactions that involve interest of any sort. Maybe these three people are of that faith.

And, if they merely wanted to elect zero deferrals, the ADP test will fail every year, and with the exception of catch-up, all the owners' deferrals should have been refunded. For 2014 and earlier, they would be in a refund/1-to-1 or QNEC correction.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Also, I have seem people waive rights to join a plan because of a faith that precludes them from entering into any transactions that involve interest of any sort. Maybe these three people are of that faith.

I suppose that if the employer went out of its way to hire people of that faith, while it might violate other laws, they would be fine with respect to the pension laws!

Always check with your actuary first!

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agree, plan would fail coverage if the NHCE actually elected out of the plan.

however, if the2 owners are over age 50 and they deferred less than 6000 then oddly enough the plan wouldn't fail ADP testing because the deferrals are treated as catch up, and then the plan wouldn't need top heavy either but that is an odd scenario

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agree, plan would fail coverage if the NHCE actually elected out of the plan.

however, if the2 owners are over age 50 and they deferred less than 6000 then oddly enough the plan wouldn't fail ADP testing because the deferrals are treated as catch up, and then the plan wouldn't need top heavy either but that is an odd scenario

Are you sure? In this case I thought the plan failed ADP testing but refunds were not made because the deferrals are recharaterized as catch-up and retained by the plan.

I fully admit this could be one of those strange IRS loopholes but my understanding is the key's have an allocation rate in this case for TH purposes but I'll be the first to admit my understanding of this could be faulty. I will also say I've never come across this particular set of facts in practice so I haven't researched it beyond cursory academic review.

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1.414(v)-1(d)(3)(I)

Catch-up contributions with respect for the current year are not taken into account for purposes of section 416.

however, catch-up contributions for prior years are taken into account for purposes of section 416. thus, catch up contributions for prior years are included in the account balances that are used in determining whether the plan is top-heavy under section 416.

so, on the one hand, you say "Yes based on account balances included prior catch up contributions the plan is top heavy. Now, how much did the HCE receive during the year? nothing because it is all catch up

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