Top heavy allocations in cross testing

[Guest SDS]

Corbel does a good job explaining in their help screens how to handle top heavy contributions when cross testing but I need some feedback from real people!!

Under the "safe harbor" method employees receiving only top heavy minimums are treated as not benefitting and if they have 501 or more hours they are shown with zeros in both 401(a)(4) testing and average benefit testing.

Under the "non safe harbor" method, the opposite is true, their top heavy minimums are converted to an EBAR.

I have a client with only profit sharing in their plan which also is top heavy. There is an 18 year old who receives a top heavy minimum and if I use "non safe harbor" method it allows a huge increase for the HCEs over prior years, but I am worried about what "non safe harbor" means to the IRS? Anyone else dealt with this issue?

[Guest]

forget the terminology 'safe harbor' and 'non safe harbor' for now.

Look at it this way:

I make a profit sharing contribution, evryone receives a 10% contribution expect for the 18 year old who gets 3%.

so far so good?

ok, instead of that scenario, I have a cross tested plan, all the HCEs get 10%, the NHCE gets 3%. When I test, I test everybody.

so in other words, your top heavy plan is no different than a cross tested plan, simply different allocation rates to different people.

Now, in a purely top heavy plan, if you can pass ratio % test by treating the top heavy individual as includable and not benefitting, you are finished. That is something almost impossible to do in a cross tested plan.

I think technically you are supposed to test the 'top heavy' only group, but since there are rarely HCEs in that group, that 'plan' passes.