Jump to content
coleboy

Suspending the SH Match

Recommended Posts

We have a number of clients that are considering suspending their safe harbor match due to COVID-19. There are a couple that, after doing their 2019 year-end review, would be Top Heavy for 2020. If they suspend their 2020 SH Match, will they have to owe the Top Heavy contribution for 2020? 

Share this post


Link to post
Share on other sites
22 minutes ago, coleboy said:

We have a number of clients that are considering suspending their safe harbor match due to COVID-19. There are a couple that, after doing their 2019 year-end review, would be Top Heavy for 2020. If they suspend their 2020 SH Match, will they have to owe the Top Heavy contribution for 2020? 

Umm..... a safe harbor match does not meet the top heavy rules in the first place.  So IF the plan is TH and a Key gets an allocation, they will be required to make sure they meet the TH minimums.  Seems like the suspension of the 2020 SH match is not at issue for that question.  Am I missing something?

Share this post


Link to post
Share on other sites

Umm, am I missing something? I thought if the plan had a safe harbor match that satisfied the ADP and ACP, it is exempt from the top heavy rules.

  • Thanks 1

Share this post


Link to post
Share on other sites
18 minutes ago, coleboy said:

Umm, am I missing something? I thought if the plan had a safe harbor match that satisfied the ADP and ACP, it is exempt from the top heavy rules.

Reread my answer and you will find this: So IF the plan is TH and a Key gets an allocation, they will be required to make sure they meet the TH minimums.  As too often is the case, when people write they do not provide enough info. The original question not does say this is a plan that meets the rules to avoid TH (meaning no employer PS contribution).  A plan that is designed to not have to meet TH rules is a plan that is EXEMPT from TH, not one that MEETS TH rules.  FWIW.

Share this post


Link to post
Share on other sites

Coleboy -

Yes you are correct.  I understood that there were no contributions to your plan besides 401k and safe harbor.  Discontining the safe harbor match in a plan like tat could be absolutely devestating in terms of expense,.  I  think of the fast food chain with 6 months of eligibility with just a dozen managers participating.  The top-heavy minimum would be multiples of the safe harbor match.

In these situations, you have but one option. And even this option only works if the business is experiencing a "substantial business hardship."  If your client is experiencing a substantial business hardship the plan can be terminated and still maintain its safe harbor status.  There is no other way to preserve the safe harbor / top-heavy exemtpion.

Hopefully they will fix this in time through legislation.  I've already begun terminating a couple of plans because of this very very stupid rule.  I actually hold out hope that someone will look at this and say "these top-heavy rules are so stupid!" and just get rid of them. They are a cancer that attacks small businesses. I don;t think cancer is too strong a word.  Businesses that miss this rule in a manner I described will be decimated by this obligation.  And clearly some will (most often those run by ABC payroll company or XYZ bundled provider).  

Edit:  The term "substantial business hardship" has a very specific definition. Check out the regs.

 

Share this post


Link to post
Share on other sites

Another sad effect of the top-heavy rule can be to dissuade a business from creating a retirement plan, or dissuade a service provider from taking on a small-business plan as a customer.

Before the safe-harbor regimes, I had service-provider clients that would not offer services if a prospect’s small size suggested a risk that a plan could be or become top-heavy.  One did some math and made up a hard rule to refuse a plan with fewer than 12 eligible employees.

The sales executives made these decisions.  Why?  They were tired of complaints from business owners who said they were surprised by a need for a top-heavy minimum contribution.  “Why didn’t anyone tell me . . .?”  Even when we reminded a complainer that we had presented a distinct plain-language warning about the top-heavy risk, the response always was “you know I never read anything.”  And it was too difficult to prove the oral warning we required a sales rep to deliver.  We found no warning would be enough to protect the business.  Nuisance settlements with, and wasted time on, complainers ate away at the already small margin in that line of business.  Instead, we screened out prospective customers.

Share this post


Link to post
Share on other sites

I live in that market and pretty much tell owners "you're pretty much going to have to give 3% to your employees."  I don't run into many problems.

Share this post


Link to post
Share on other sites
3 minutes ago, Bird said:

I live in that market and pretty much tell owners "you're pretty much going to have to give 3% to your employees."  I don't run into many problems.

Really?  Because a lot of mine are not wealthy.  Some make a relatively modest income.  Not poor, but not so wealthy that a 3% contribution would just be taken in stride.  SH Match of $10,000 a year to top-heavy minimum of $30,000 a year would be, to put it mildly, a "problem."

Share this post


Link to post
Share on other sites
1 hour ago, austin3515 said:

SH Match of $10,000 a year to top-heavy minimum of $30,000 a year would be, to put it mildly, a "problem."

Not to drag this out but you're (the sponsor) pretty much spinning your wheels and wasting money with a SH match only plan.  I have a couple but hold my breath for the reasons you describe.  But wait, a company with a $1M payroll has a TH plan?  And a $10,000 contribution?  Something is wrong with that scenario.  I'm not saying I couldn't imagine it but that should be awfully rare.

Share this post


Link to post
Share on other sites

Not that rare.  We have a couple fast food chains that fit the bill.  And you're saying that a SH Match only plan is not a good design?  I cant understand that.  When the work force is lower paid the owner gets an $11,000 match, maxes out his or her 401k, and the staff contribution might be next to nothing.  

Share this post


Link to post
Share on other sites
4 hours ago, austin3515 said:

Really?  Because a lot of mine are not wealthy.  Some make a relatively modest income.  Not poor, but not so wealthy that a 3% contribution would just be taken in stride.  SH Match of $10,000 a year to top-heavy minimum of $30,000 a year would be, to put it mildly, a "problem."

Just to drag it out a little more.... 🙂

We also don't have a problem; almost all of our 401(k) plans use the 3% nonelective SH provision, because we ASSUME it will be top heavy, if not immediately, then very soon into the life of the plan.  I often tell clients: "Top Heavy isn't bad, it's good. It means you are getting most of the money in the plan, which is what you told me you want. If the plan is not top heavy, you should probably fire us because we have done a crappy job for you."

Most of the plans that you describe usually end up being a SEP or even a payroll deduction IRA program, in which the employer can pick and choose who is going to get extra money in their paycheck which they can contribute into their deductible IRA.  That almost always provides enough benefits to meet what they are trying to do, and they don't have to pay us for anything.

I agree that the vast majority of our clients WANT to get more money to the owners and don't care all that much about what the employees defer, and they are willing to buy in to the 3% (or 5% if general tested; gateway test). 


 

Share this post


Link to post
Share on other sites

Just becauise I feel like we are operating in different realities.  You agree that if a plan has husband and wife owners making $100,000 a year, and they have 10 employees making $30,000 a year, that a safe harbor match plan design is perfect?  So they each get to contribute $19,500, get the $4,000 safe harbor match, and maybe one or two people get a $1,000 of safe harbor match? The fact that the plan is top heavy is moot because the plan is exempt from those rules.  Admittedly if the world falls apart that can be problematic, but that's just not typically in the cards (and if it really falls apart you can term under substantial hardship rules and still be exempt).

To read your responses you would think that you might advise against such a plan design? 

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×
×
  • Create New...