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Safe Harbor Match and Top Heavy Rules

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This is a case where I was SO sure I knew the rules and it appears that I do not!  

A client has a Top Heavy 401(k) plan with deferrals, Safe Harbor enhanced 4% match, and integrated profit sharing.  They use all of it - maxing out the doctor/owner via the profit sharing contribution and contributing whatever is required for the rank and file. The profit sharing has a last day and 1000 hour requirement.

One participant worked less than 1000 hours every year except for 2014.  That one and only year, she got her 1000 hours, met eligibility for the first time and got into the plan.  For 2015, she did not defer and of course did not get a match, but she got the 3% TH minimum.  In 2016 she began deferring 4% of pay  and got the SH match but NO profit sharing.  In 2017, same thing.  I was working on 2018, noticed that once again, she deferred and got the SH match but no profit sharing at all.  

I thought we had made a mistake in 2016 and 2017 and were about to make a mistake in 2018 by not giving her the TH minimum 3% in addition to her SH match.  I knew that if a plan had ONLY SH Match and no profit sharing at all, then the Top Heavy requirements were deemed to be satisfied.  But I believed that from the moment you gave the HCEs 3% or more in profit sharing, you had to be sure that all of the NHCE participants got at least 3%, even those who didn't work 1000 hours.

I questioned the software vendor as to why the under 1000 hours participant did not receive a 3% TH minimum for 2016-2018 and I was told that the employer doesn't have to give her a TH minimum 3% profit sharing contribution because she got 4% in SH Match and that takes care of it.  

So if there had been 4 under 1000 hours participants in the plan, and 2 deferred 4% of pay and 2 deferred nothing,  the 2 who deferred and got the SH match get NO profit sharing, and the 2 who didn't defer anything would get the Top Heavy minimum 3%?  That hardly seems fair or right, but what do I know......

I just want to run this up the flag pole and be sure that others agree.  If this is really right, so be it - what do you say?

Thanks as always.

 

 

 

 

 

 

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EGTRRA changed 416(c)(2)(A) to provide that matching contributions count towards the top-heavy minimum. Of course, the plan needs to say that.

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Well true, Mr. Bagwell, the employee who deferred after all does have his own 4% plus his employer's 4% for a total of 8% and is better off in the long run than the employee who "got something for nothing" and ends up with 3%...

And meanwhile, Kevin C, yes, the underlying basic plan document does seem to say something to this effect.

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This can be a bit of a hassle when the PS plan has gateway issues to work through, too. 

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Mr Bagwell has is right; what does "fairness" have to do with anything?  Larger plans don't usually even have to worry about top-heavy.

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On 3/1/2019 at 4:32 PM, Bri said:

This can be a bit of a hassle when the PS plan has gateway issues to work through, too. 

Match is not an Employer Non-elective, so it won't affect gateway.

It stinks when someone defers 2%, gets a 2% match and must get a 1% TH.  Then they have to get the gateway.

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