Top Heavy Safe Harbor Plan

[Guest bogart126]

i have a top heavy safe harbor plan that is using the 3% nonelective contribution method to satisfy safe harbor. the definition of compensation for newly eligible employees is from their participation date. this, i believe, is allowable for a safe harbor plan, however, the minimum 3% contribution for top heavy is based on 415 compensation which disregards participation date compensation and uses the entire plan year's compensation. does the fact that the plan is a safe harbor plan supersede the top heavy rules?

[Guest TAG]

Everthing that I have read indicates that in order to use the three percent to do double duty, (satisfy the top-heavy minimum) plan year comp must be used. So, no.

[Tom Poje]

I not 100% sure on that.(but again I stress I don't know for sure) I think you can end up with a 3% nonelective on date of participation, and then a 3% on the remainder which is subject to vesting. Fun stuff to keep track of, as you have a small balance to keep track of that is subject to vesting.

On the other hand, if the plan was cross tested, and you are running the plan for 2002 then you would end up with a

3% 100% vested contribution and a 2% subject to vesting contribution, so maybe its not that unusual to keep track of two account - one fully vested and one subject to vesting..

[Guest Giovanni]

I was just researching this issue and I came across this old posting. I'm not 100% sure, but I feel that since the plan is "deemed" not top heavy, it's not necessary to provide a 3% TH contrib based on full year comp for newly eligible employees if the definition of comp is "comp while a participant". I believe it's ok to only provide the 3% nonelective SH contrib based on the comp earned while a participant. Can anyone point to a sight that deals with this issue? In chapter 11 of the 2005 ERISA Outline Book, see the last sentence of 2.a.1 on page 11.505.

[Bird]

I feel that since the plan is "deemed" not top heavy, it's not necessary to provide a 3% TH contrib based on full year comp for newly eligible employees if the definition of comp is "comp while a participant"

That's right...provided there are no other contributions. I don't know that you need a cite other than Code Sec 416(g)(4)(H) as amended by EGTRRA 613(d).

[himt4]

Does everyone agree with this?

Everything I look at regarding the "safe harbor top heavy exemption" seems to only refer to Safe harbor 401(k) plans that use a match to satisfy safe harbor.

I dont see anything that says that safe harbor plans that use the 3% non-elective safe harbor plan contribution are exempt from top heavy minimums (since the 3% can be applied towards satisfying the TH minimum, the "exemption issue" only becomes an issue as you mentioned when Plan comp excludes pre-participation comp but top heavy calculations must use full year comp).

Can anyone tell me where it says that "3% non-elective safe harbor contribution plans" are just as exempt from Top Heavy rules as "safe harbor matching plans"?

[Archimage]

Yes. Some additional information can be found in Rev. Ruling 2004-13 that I think supports this conclusion.

For what it is worth, The ERISA Outline Book agrees with this position as well.

[Bird]

Can anyone tell me where it says that "3% non-elective safe harbor contribution plans" are just as exempt from Top Heavy rules as "safe harbor matching plans"?

That's a really good question, because I remembered that being an issue (but not the details) but was too lazy too look it up...and now I see that the cite I gave does specifically say "matching" contributions.

My recollection is that if you follow the cite, the requirements that must be satisfied include the 3% SH nonelective contributions, and that the word "matching" is superfluous - extraneous might be a better word - and that it wasn't intended to be so limited, and I think the IRS confirmed this, but I can't remember how. Maybe someone else can confirm this - or rebut it. I've been wrong before.

Ah, I see Archimage has already replied. Thanks...

[himt4]

Rev ruling 2004-13 was one of the things I was looking at.

It says...

"Section 416(g)(4)(H) provides that the term “top-heavy plan” does not include a plan that consists solely of (1) a CODA that meets the requirements of § 401(k)(12) and (2) matching contributions that meet the requirements of § 401(m)(11). Section 416(g)(4)(H), which is effective for years beginning after December 31, 2001, was added to the Code by the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16."

The 4 "situation"/examples that Rev ruling 2004-13 give all provide for situations where a safe-harbor matching contribution is given, so the "situations" do not address our issue about the "3% non-elective safe harbor contribution"

Unfortunately, I don't have the ERISA outline book. Perhaps someone can provide me a quote from this book that supports that "3% non-elective safe harbor contribution plans" are just as exempt from Top Heavy rules as "safe harbor matching plans".

[Guest Giovanni]

The following is from the 2005 ERISA Outline Book:

"A safe harbor 401(k) plan provides for a 3% nonelective contribution to all employees who are eligible for the 401(k) arrangement. The nonelective contribution satisfies the requirement of IRC 401(k)(12)©. There are no other contributions made to the plan. The plan is not a top heavy plan for plan years beginning after December 31, 2001, even if the top heavy ratio of the plan would exceed 60%."

[R. Butler]

I've never interpreted the word "and" to mean you had to meet safe harbor using matching contributions. The word "and" should be interpreted to mean that if you do provide matching contributions, they must meet the limitations imposed under 401(m)(11). Remember 401(k)(12) doesn't contain the same match limitations as 401(m)(11).

Could it have been worded better? Probably, but a plain reading can as easily lead you to the conclusion I reach as the opposite.

[Tom Poje]

I on the other hand have taken the position it is unclear.

to me 'and' means 'and'.

as indicated the only people it effects are those who have an entry date other than the first day of the plan year (or possibly if the plan has an odd definition of comp).

I would lean toward the conservative side for at least the following reasons (if not more):

1.if plan used 'otherwise excludable option' you still have to provide top heavy.

2.why wasn't the reg worded 'if there are no other contributions but the safe harbor nonelective OR the safeharbor match (or both) the plan gets a free ride from top heavy.

but then, I could easily be wrong.

[R. Butler]

Well I don't disagree that and means and; I just intepret it to mean that you must meet both the ADP & ACP safe harbor, recognizing the different match restrictions imposed by 401(k)(12) & 401(m)(11).

If I'm wrong it wouldn't be the first time. It still doesn't make sense to me that allowing people to defer immediately, but excluding those people from the match takes away the top heavy pass. Alas though I have finally accepted that.

[Tom Poje]

I've gone ahead and submitted the question to ASPPA IRS Q and A, so maybe in Nov we will have an IRS 'unofficial' position.

[Bird]

Good idea to submit as a Q&A.

I tend to get fuzzy on a lot of things, but I do have it pretty well burned in the gray matter that the 3% SHNEC satisfies the requirements. I just did a search on google and found several places that agree, but with no cites. After thinking and researching it some more, I think the reasoning is:

The "and" really means "and if the plan has matching contributions" because

401(k)(12), which is cited in 416(g)(4)(H), includes both the SH Match and the 3% SHNEC, and 401(m)(11) talks about safe harbor matches, including optional matches.

So the TH exemption is met if you have a plan that consists "solely" of a required contribution (SHNEC or SH match) "and" another type of contribution that is really optional - either the SH match that is an one way to satisfy the ADP requirements, and/or the true optional match that still satisfies ACP.

(Pretty much exactly what R Butler said - sorry to repeat.)

[Kevin C]

I went through this discussion in late 2003 with our prototype document provider. The only source they could give for the 3% SH being exempt from Top-Heavy was an IRS informal comment made at the 2002 ASPA annual conference in DC.

I was at that ASPA conference in 2002 and attended the IRS Q&A session along with two co-workers. None of us remembered any reference in the session to 3% SH being exempt from top-heavy. They did address the examples of match safe harbor plans that were later published in Rev Ruling 2004-13. Maybe the 3% issue came up in a different session, but I didn't hear anyone mention it during the conference. You would think news that big would have had the whole conference buzzing.

Hopefully, they will answer Tom's question at the Q&A session this year. It might help if ASPPA gets this question submitted from several people. I submitted the same question last year, but it didn't make it into the Q&A session.

[Belgarath]

I have always taken the interpretation that the nonelective 3% gives the employer the pass on top heavy status, assuming all other requirements are met.

While I acknowledge the fact that clearer drafting, in retrospect, would have alleviated the concerns expressed, I still feel comfortable with the more "aggressive" interpretation.

The following excerpts are from the HR 1836 Conference Committee Reports.

"The Committee understands that some employers may have been discouraged from adopting a safe harbor section 401(k) plan due to concerns about the top-heavy rules. The Committee believes that facilitating the adoption of such plans will broaden coverage. Thus, the Committee believes it appropriate to provide that such plans are not subject to top-heavy rules."

(I should mention that the above is following a discussion of BOTH nonelective and matching safe harbor plans.)

"The provision provides that a plan consisting of a cash-or-deferred arrangement that satisfies the design-based safe harbor for such plans and matching contributions that satisfy the safe harbor rule for such contributions is not a top-heavy plan. Matching or nonelective contributions provided under such a plan may be taken into account in satisfying the minimum contribution requirements applicable to top-heavy plans."

To me, it isn't logical to think that the IRS or Congress wanted to prohibit the favorable treatment for a nonelective, when a matching contribution plan where many participants receive nothing whatsoever satisfies the requirements. I believe the purpose of the "and" is to confirm that a plan may have BOTH a nonelective and a match, as long as both of them meet the safe harbor requirements.

And yes, it would be nice if the IRS would confirm all this at the ASPPA conference or some similar forum.

[Tom Poje]

of course, it could be something as simple as the govt simply forgot about ees who enter midyear would miss out on top heavy because of having partial comp.

I figure it should be more something like 'did the ee have the potential to receive an amount equal to the top heavy minimum'. in other words, the employer is not 'penalized' by having to provide a top heavy minimum to someone who could have deferred and gotten a safe harbor match.

but anyway, I submitted that one, as well as asking about terminating a safe harbor that provides the SHNEC. The regs really only talk about stopping the safe harbor match.

[Guest Giovanni]

I asked TAG and here is their reply. Hopefully it will be addressed at the ASPPA meeting in Nov.

ANSWER

1. Yes a plan where all the contributions fall within the ADP and ACP

safe harbors is exempt from top-heavy testing and the other requirements.

See below.

2. These are two different rules. If a plan has other contributions

other than those that fall within the ADP and ACP safe harbors, the plan is required to comply with the top heavy rules. In this case the 3% Non-elective safe harbor contribution may not be sufficient to satisfy top heavy because it is based on a different required definition of compensation and a different computation period.

SEC. 613. MODIFICATION OF TOP-HEAVY RULES.

(d) DEFINITION OF TOP-HEAVY PLANS.Paragraph (4) of section 416(g) (relating to other special rules for top-heavy

plans) is amended by adding at the end the following new subparagraph:

(H) CASH OR DEFERRED ARRANGEMENTS USING ALTERNATIVE METHODS OF MEETING NONDISCRIMINATION REQUIREMENTS.?The term 'top-heavy plan' shall not include a plan which consists solely of (i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), and (ii) matching contributions with respect to which the requirements of section 401(m)(11) are met.

If, but for this subparagraph, a plan would be treated as a top-heavy plan because it is a member of an aggregation group which is a top-heavy group, contributions under the plan may be taken into account in determining whether any other plan in the group meets the requirements of subsection ©(2).

QUESTION

1. A safe harbor 401(k) plan makes a 3% nonelective contribution to the

plan and there are no other contributions made to the plan. Is this plan "deemed" NOT top heavy? If so, can you site where it says that the 3% nonelective safe harbor contribution allows the plan to be "deemed" NOT top heavy. I could only find where it says that the matching safe harbor contribution exempts the plan from the top heavy rules.

2. Also, assuming the plan is "deemed" NOT top heavy, is it ok that a

new participant is only getting a 3% safe harbor contribution based on compensation "while a participant" if that is how the plan defines compensation? This person will not get 3% of a full year compensation as he normally would have if the plan was top heavy and was not a safe harbor plan.

[R. Butler]

I asked TAG and here is their reply. Hopefully it will be addressed at the ASPPA meeting in Nov.

ANSWER

1. Yes a plan where all the contributions fall within the ADP and ACP

safe harbors is exempt from top-heavy testing and the other requirements.

See below.

2. These are two different rules. If a plan has other contributions

other than those that fall within the ADP and ACP safe harbors, the plan is required to comply with the top heavy rules. In this case the 3% Non-elective safe harbor contribution may not be sufficient to satisfy top heavy because it is based on a different required definition of compensation and a different computation period.

SEC. 613. MODIFICATION OF TOP-HEAVY RULES.

(d) DEFINITION OF TOP-HEAVY PLANS.Paragraph (4) of section 416(g) (relating to other special rules for top-heavy

plans) is amended by adding at the end the following new subparagraph:

(H) CASH OR DEFERRED ARRANGEMENTS USING ALTERNATIVE METHODS OF MEETING NONDISCRIMINATION REQUIREMENTS.?The term 'top-heavy plan' shall not include a plan which consists solely of (i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), and (ii) matching contributions with respect to which the requirements of section 401(m)(11) are met.

If, but for this subparagraph, a plan would be treated as a top-heavy plan because it is a member of an aggregation group which is a top-heavy group, contributions under the plan may be taken into account in determining whether any other plan in the group meets the requirements of subsection ©(2).

QUESTION

1. A safe harbor 401(k) plan makes a 3% nonelective contribution to the

plan and there are no other contributions made to the plan. Is this plan "deemed" NOT top heavy? If so, can you site where it says that the 3% nonelective safe harbor contribution allows the plan to be "deemed" NOT top heavy. I could only find where it says that the matching safe harbor contribution exempts the plan from the top heavy rules.

2. Also, assuming the plan is "deemed" NOT top heavy, is it ok that a

new participant is only getting a 3% safe harbor contribution based on compensation "while a participant" if that is how the plan defines compensation? This person will not get 3% of a full year compensation as he normally would have if the plan was top heavy and was not a safe harbor plan.

I'm probably missing it, but their answers do not make sense.

They answer question #1 that yes that a plan providing only a SHNEC would be exempt form top-heavy requirements.

They answer #2 that an additional top-heavy may be required because the SHNEC isn't based on full years comp. The SHNEC isn't required to be based on full years comp. for mid-year entrants; therefore in application TAG seems to be taking the position that the 3% SHNEC is not exempt from the top-heavy.

[Guest Giovanni]

I agree, the second answer also confused me. I think they are saying that the plan is not exempt from top heavy ONLY "If a plan has other contributions

other than those that fall within the ADP and ACP safe harbors". In that case, an additional top heavy contribution would be required if compensation isn't defined as full year compensation.

[R. Butler]

I agree, the second answer also confused me. I think they are saying that the plan is not exempt from top heavy ONLY "If a plan has other contributions

other than those that fall within the ADP and ACP safe harbors". In that case, an additional top heavy contribution would be required if compensation isn't defined as full year compensation.

That wouldn't be correct because a plan meeting safe harbor with the match & having additional contributions not falling within 401(m)(11) would not get the top heavy pass regardless of whether comp. includes wages prior to entry.

[Guest Donkey Kong]

TAG sucks!!! They really do.

[R. Butler]

Thats harsh. I don't know anything about them; this one answer they gave Giovanni just doesn't make sens to me.