Entry date of July 1 and 3% safe harbor

[Guest rffahey]

Situation: I have a

Top heavy / safe harbor ( 3%) 401k plan with dual entry dates of July 1 and Jan 1.

Employee enters plan on 7/1/03.

I am getting mixed answers from TPA's.

Some say the 3% is due on comp while a participant ( July 1 to Dec 31) while others say it is due on full year comp because it is top heavy.

There are no other employer profit sharing contributions made to the plan other than the 3% safe harbor.

Thank you

[Archimage]

I am assuming your plan doc says your definition of comp excludes comp before participation. In your case you would have 3% SHNEC on the comp from 7/1 to 12/31. The top heavy minimum would be calculated using the full year's compensation. The result would be the same but your vesting will be different.

[Mike Preston]

I don't think the result is the same. If the plan is top heavy the top-heavy minimum, which is likely to be 3%, is calculated on the basis of full year compensation.

[pmacduff]

I think you might be getting different answers because a safe harbor plan that exisits "SOLEY" of deferrals & the safe harbor contribution is supposed to get a free ride on top heavy. It has been said that if there are ANY allocations (such as prior forfeitures) you lose the free ride. If the plan has other allocations and if the plan uses comp while a participant & plan is top heavy then you compute the 3% safe harbor on 7/01 - 12/31 comp and the top heavy on the total annual comp, compare the 2, & the participant should receive the higher of the 2, agreed?? I believe the issue here for the original poster is that if the plan exists "SOLEY" of deferrals & safe harbor, then you get the top heavy free ride and only have to provide the 3% on comp from July - December, is that right rffahey???

[Guest rffahey]

Yes, that is the question but the answers are not really clear!

Does it matter if the plan is top heavy ?

Is a 3% safe harbor plan subject to top heavy rules - I think so ??

Therefore does an employee who enters on 7/1/03 get 3% on the full calandar year which is generally what top heavy requires ??

Many thanks.

[Archimage]

Mike, why wouldn't the results be the same? 3% SHNEC of half year's comp plus the top heavy minimum difference is still 3% of a full year's comp.

I missed the sole safe harbor piece. I would agree. You are exempt from providing top heavy minimums and it would only have to be on half year's comp.

[Mike Preston]

I agree that if the plan is solely a safe-harbor plan then the plan does not need to provide the top-heavy contribution.

Archimage, I think you and I are saying the same thing. It is just that you characterized the top-heavy minimum as encompassing the SH 3%, while I was saying that the SH 3% is different from the top-heavy total. But I think we agree on the result.