| Question 88: Does adding a low wage hourly employee as a 401(k) plan participant help to alleviate a "top-heavy" problem?
Answer: Short Answer: It might help, but not necessarily. For example, generally, in order to help, there must be contributions on behalf of the employee that are included in the top-heavy calculation and the employee must not be a key employee. Discussion: In order to know whether a particular contribution is going to help, you should go through the complete top-heavy analysis. You can find a more complete discussion in the outline, "Top-Heavy Rules and Keogh Plans," at http://www.boardmanlawfirm.com/readingroom/TopHeavy.pdf Some of the issues that might affect whether you actually avoid top-heavy status by adding a low wage employee are discussed below: 1. Certain contributions to account balances of non-key employees may not help avoid top-heavy status. Generally, a plan is top-heavy if more than 60% of the total of the account balances of all employees is held by key employees. See Code Section 416(g). Even assuming the low wage employee is not a key employee, there are limitations as to which contributions are included. - Note that timing of contributions may be a factor. Top-heavy calculations are performed on the "determination date" of the plan, which, for plans in their first year is the last day of the plan year; for any other plan, it is the last day of the preceding plan year. See Code Sections 416(g)(1) and 416(g)(4)(C). Your plan's top-heavy status based on the preceding plan year will not change by making contributions after the determination date.
- Remember that employee-initiated rollovers into a plan from an unrelated employer's plan generally are not counted. See Q&A 86 and the outline mentioned above.
2. A "low wage" and/or "hourly" employee may be a key employee which would not help avoid top-heavy status. It is important to look at the definitions. See Q&A 86 and the outline mentioned above. For example, a more than 5% owner with low wages generally would be a key employee since there is no earnings requirement. Code Section 416(i)(1)(A)(ii). Remember that the account balances of former key employees are not taken into account in calculating top-heaviness. Code Section 416(g)(4)(B). This Q&A is not legal advice. Individuals should seek advice based on their particular circumstances from their own counsel. Nothing in this Q&A is intended to be used, and no information can be used, for the purpose of avoiding penalties under the Internal Revenue Code, or promoting, marketing, or recommending to another party any transaction or matter addressed in this Q&A. |
