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Hello! We have a client that started their plan in 2022 and failed ADP and TH testing due to their owner maxing out their contribution. Their TH Funding was going to be almost $30k and they demanded a reversal of all the owner's contributions in 2022 which were processed recently after many conversations on why this was a bad idea and having them approve a hold harmless letter. Several questions about this: 1 - Does the reversal change the TH test? The balance as of 12/31/22 hasn't changed, and I know first-year plans can use accrual, but I have only ever used that when adding employer contributions to the total. Was not sure how this should/could be handled since I have never had a client actually go through with a request like this. 2 - Similarly, the Form 5500 will reflect the amounts that were in there on 12/31/22 since this is done on a cash basis. So do their quarterly statements. Should any of this be updated or should it all be left as-is? It's just a glaring issue in an audit and I am fine with that as the client signed off understanding they need to own everything that comes with the request. 3 - The reversal that was processed was for exactly $20,500 and all earnings/dividends remained in the plan. Thoughts on how this should be handled? Their letter of direction stated the exact amount versus making it all look like it never happened but, again, such an obvious issue if looked into. Thanks!

We have a plan that will be terminating in 2021 at some point, date has not been determined. However, the employer has been sold to new entity and employees are terminated as of 6/30/2021. The plan is Top-Heavy as of 12/31/2020. Non-key employee who is a participant and employed by the employer on the last day of the plan year gets a top heavy minimum. Is it too simple to say the the plan is terminating as of 11/1/2021 and therefore, no top heavy contribution is required? I don't want to miss anything being this feels like such an easy question.... Thanks

I need some help i have 3% nonelective safe harbor plan eligibility for deferrals is 6 months with quarterly entry. eligibility for safe harbor is 1 year with quarterly entry. plan uses entry date compensation for those that enter mid-year The plan is top-heavy for 2020. I know I have to give the top heavy contribution to those that are only eligible for deferral, to satisfy top heavy. I assume i need to make an additional contribution to those that entered mid year for the safe harbor, so that they receive 3% of full year compensation. is this correct? Thank you for your time!

Facts: Plan is top-heavy; Has a 3% non-elective safe harbor contribution; Has a stated match of $0.25 for each dollar deferred up to 4% of pay for Non-HCE only – has last day/1000 hour requirement; Has a discretionary profit sharing plan, but has decided NOT to make a profit sharing contribution for 2020. I know if they make a profit sharing contribution (which they always have in the past) that they would need to satisfy top-heavy minimums, but in 2020 they are not going to make a profit sharing contribution. My question is if for 2020, do they have to satisfy the top-heavy minimums? I know that adding allocation req's to a match makes nondiscrimination more difficult to pass, but does the fact that the match is for non-HCE only help? Any insight you can provide would be much appreciated! Thanks!

A plan is effective for the first time on 8/1/2020. When determining Key status for Officers and greater than 1% owners for the initial plan year, what compensation is used? 1/1/2020 - 12/31/2020, or 8/1/2020 - 12/31/2020?

We have a client who would like to allocate a Top Heavy contribution to both Key and Non-Key employees. The language in the document regarding Top Heavy allocations is as follows: Each Non-Key Employee who is a Participant, or was eligible to be a participant in the plan year, and is employed by the Employer on the last day of the Plan Year will receive a top-heavy minimum allocation for that Plan Year, irrespective of whether he or she satisfies the Hours of Service condition under the Employer's Adoption Agreement... Based on this language, is it permissible to allocate to Key employees? Any feedback is appreciated! Thank you

A client is an adopting employer in an MEP. The employer is Top Heavy for 2020 and the keys are contributing. The employer is stating that they will be selling a business unit this year and terminating non-key and possibly key employees. How does this impact the 2020 Top Heavy minimum? Are those employees simply deemed as terminated prior to the end of the year and not allocated the Top Heavy minimum? Or, would the minimum be calculated on compensation until the sale for those employees? Any feedback is appreciated. Thank you.

If anyone has an opinion and/or something they have found from the powers-that-be, please share. This has stumped several colleagues but I'm sure it can't be a totally unique situation. ABC Company has a deferral-only 401(k) plan (no match or non-elective provisions) with one key employee Fred, who is the CFO and earns $250k per year. The ABC Company 401(k) Plan is top heavy. Fred is also employed by XYZ Company - completely unrelated to ABC Company - and participates in the XYZ Company 401(k) plan. In 2019 Fred had a $10,000 excess deferral - he contributed the IRS maximum in the XYZ Company 401(k) plan and $10,000 into the ABC Company 401(k) Plan. If the entire $10,000 that Fred contributed to the ABC Company 401(k) Plan is refunded as an excess deferral, is the ABC Company still required to make a top-heavy minimum contribution to non-key employees? My initial reaction is no, because an excess deferral is not an annual addition, but I can't find anything that would support this. I have colleagues that feel ABC Company is required to make a 3% top-heavy minimum contribution since Fred contributed 4% of his compensation to the plan even though the entire 4% is being refunded as an excess deferral. Again - they haven't provided anything to support their position either.

We have a company that is owned by several trusts at 20% ownership each. Each individual is the primary beneficiary of their respective trust, so they are considered 20% owners of the company. However, are the children of the beneficiary of the trust also attributed 20% ownership of the company? This scenario has come up due to key employee determination for Top Heavy. My initial instinct says yes, but I would appreciate any feedback and/or reg citations. Thank you!

An employer is Top Heavy in it's initial plan year. If the plan makes a discretionary match to NHCEs, is this employer contribution included in the Top heavy ratio for the first year? Or does it have to specifically be a non-elective contribution as specified in the plan document? Any feedback would be greatly appreciated. Thank you.

Cross Tested Plan, 3% SH non, Top Heavy, Semi Entry at 4/1 and 10/1 I have an employee with a legitimate participating compensation of 163.01. Participant was eligible 4/1 and terminated 4/5. Employee is entitled to 3% safe harbor and then a 2% profit sharing for the year. So the Gateway 414(s) compensation would show 163.01 with a 401a allocation of 8.15. So I need to check to make sure the employee is receiving at least 3% compensation on full year comp for top heavy status. Employee need 516.80 additional funds to receive top heavy minimum. Full year comp was 17,498.33. So here is the rub and the question. The benefit percentage of the employee in question would be like 300% plus based on the 524.95 401(a) total and compensation of 163.01. Would you leave it this way? Or do something different? On this plan, there are generally 2 to 3 employees that come in mid year and need a top heavy minimum. Where everyone else would show a benefit percentage of 5%, the 2 or 3 might show as 5.8%. Gateway then passes, and then I go to the next steps of making sure the other test pass. I just haven't seen a legit participating comp scenario skew the percentage this wildly. Thanks

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.

Good afternoon to all, A plan of ours has a 3 doctors plus staff. While all docs are HCEs, only one is also Key - the 100% owner. The other 2 doctors have signed irrevocable waivers of participation and are not part of the plan. They are in the census in our software program, classified as being in an ineligible class of employees. When we run the Top Heavy calculation, we get error messages saying that we have failed to meet the TH requirements because these two doctors are not getting a TH minimum contribution. If they have signed the irrevocable waiver, it is our understanding that they are not eligible for any portion of the plan at any time, including the TH minimum. Are we correct on this? Yes we have read the plan document and yes we have a call in to the software provider to see if we are coding things incorrectly. But in the meantime we wanted to ask the experts if these two doctors are supposed to be counted for any purposes in anything in the plan, Top Heavy or anything else? Thanks for any advice and don't shoot the messenger. Per usual I am being asked to resolve something on a plan that is not mine.

If a Top Heavy Plan has only deferrals, safe harbor matching contributions, and prevailing wage contributions, does it lose it's free pass? I know that it gets a pass if only deferrals and the safe-harbor contributions are made, but does the prevailing wage contributions blow that up or is there another exception for those contributions? Now, what happens if the eligibility for prevailing wage is immediate and the other contributions are 21 & 1 YOS? Usually that would blow it up too, but again I don't know if there is an exception for prevailing wage contributions. Thanks in advance!!

Plan is a 'definite' 3% safe harbor annually. HCE's are excluded from receiving the safe harbor contribution. Plan is 89% top heavy Compensation is recognized from date of participation Plan is allocating 3% safe harbor to NHCE's Plan is allocating 3% profit sharing to HCE's Question: I have one 'mid-year' entrant so the safe harbor is given on participation wages. Since the plan is also allocating 3% profit sharing to the HCE's, what am I required to give the mid-entrant? A. just the 3% safe harbor on participation wages, or B. 3% safe harbor on participation wages + 3% profit sharing on wages earned before plan entry (i.e. total of 3% contribution on full years wages Thanks!

Plan excludes pre-participation compensation, comp is paid (as opposed to accrued) Plan is Top Heavy Contributions testing on cross tested basis w imputed disparity Elig 12 mos/1000 hrs (no min age), dual entry dates (1/1 and 7/1) Employee DOH 3/2016, works 1000+hrs in initial 12 mos of svc projected Entry Date 7/2017 HOWEVER Terminates 6/15/2017, therefore never enters the plan Same employee is Rehired 12/20/2017, 1st paycheck following rehire is 1/12/2018 According to the Plan, this employee enters the Plan as of Rehire Date 12/20/2017. 2017 Total Comp is $7,000 (paid Jan 1 - 6/15/2017) 2017 Elig Comp is $0 (but for THM, which is full year) PS is determined on $0 elig comp, GW is determined on $0 (Question ... is GW satisfied because 5% GW * $0 = $0?). TH is determined on $7,000 -- $210 THMin Question How is her EBAR calculated? Is her EBAR based on $210 contrib (due to THMin) and $7000 comp, even though her otherwise eligible pay is $0? Thank you

Today my skills as a magician are being questioned, as I have failed to pull a rabbit out of hat.... A referral partner has brought us a situation with a client of his who is not our client. The party in question has a 401(k) plan that eliminated its Safe Harbor match in 2012 and has been subject to all testing ever since. This employer is angry because he has been told that for the first time, his plan became Top Heavy for 2018 based on the 12/31/2017 results of the test. He has been told that if he doesn't want to be obligated to make a Top Heavy contribution of any kind, then the Key employees cannot defer in 2018. Deferrals count, and even if a Key only deferred 1% of pay, then the company would owe the non-Key participants 1% of pay as a TH minimum contribution. Of course if any Key deferred 3% or more, then the company would have to make the standard 3% TH minimum contribution. The referral partner is looking to us for some kind of magic trick to allow the Keys to defer whatever they want to defer and somehow not owe a TH minimum contribution. My crystal ball must be cloudy or something because there's nothing I can find to do about 2018. For 2019, they should adopt Safe Harbor provisions again, whether it's the 3% SHNE or the basic SH match. If they aren't willing to do that, then they just have to accept the fact that the Keys can't defer. Am I missing something? The referral partner has been told that a "creative solution" should be found. I can think of all kinds of creativity for failed ADP/ACP tests, cross-tested formulas that don't work out, etc., but I don't know of a "creative" solution to Top Heavy! Any ideas will be appreciated. Thanks!

Good morning to all! We have a plan where there are two Key employees as identified by our software and they both surprise us in how they were handled. The first one was already HCE in 2016 but not Key, by virtue of his salary. He does not own any stock in the company. In 2017 he became the President of the company. The software identifies him as a Key employee in 2017 and we thought it would be 2018 before he would be considered a Key employee. The second employee was Key already but died in 2017 and his account balance was distributed before 12/31/2017. The software put his distribution in the account balance column as a negative number and subtracted it from the President's account balance to get a net difference for the Key employees' balances for the year. To be clear: President has let's say $200,000 which is considered a Key balance, to our surprise, and deceased person's distribution of his $10,000 account balance is picked up as a negative number in the test, so the net Key balances on the Top Heavy Test are $190,000. Does this seem normal to any of you? Thanks in advance for any advice.

I am brooding over the interaction between the exemption from top heavy for safe harbor plans and a mid-year suspension of safe harbor contributions. I am thinking about three issues. For all three issues below, assume the plan would be top heavy but for the safe harbor exemption. Issue 1. The first is an old issue, but in re-reading Revenue Ruling 2004-13, I am having doubts now about Situation 4 in that ruling. Under Situation 4, the sponsor has a safe harbor match, but employees who at hire are eligible to make elective contributions have a 1 year of service requirement for the safe harbor match. The IRS responds as follows: In Situation 4, under the plan, newly hired nonhighly compensated employees who make elective contributions will not be eligible to receive any matching contributions until they have completed 1 year of service. Since this will result in a greater rate of matching contributions for highly compensated employees than for nonhighly compensated employees, the matching contributions do not satisfy the requirements of § 401(k)(12) (or § 401(m)(11)). Further, since all eligible nonhighly compensated employees under the plan do not receive safe harbor nonelective contributions or safe harbor matching contributions, the matching contributions made under the plan do not satisfy the requirements of § 401(k)(12). However, certain plans that provide for early participation may satisfy the requirements of § 401(k)(12) with respect to the portion of the plan that covers employees who have completed the minimum age and service requirements of § 410(a)(1), while satisfying the ADP test of § 401(k)(3)(A)(ii) for the eligible employees who have not completed the minimum age and service requirements. Unless a plan (within the meaning of § 414(l)) meets the requirements of § 416(g)(4)(H), no portion of the plan will satisfy § 416(g)(4)(H). (See Notice 2000-3, 2000-1 C.B. 413, Q&A-10.) I added the bold. Is this saying everyone in the plan has to receive the top heavy contribution (minus any match), or just the otherwise excludible employees? I thought for both 414(l) and top heavy purposes, the otherwise excludible employees were treated as one plan with the other participants. But I also thought you only had to give the top heavy in this situation to otherwise excludible employees. This is what has created my doubt. Issue 2. What happens if the employer only makes safe harbor contributions during a year, but in the middle of that year suspends the SH contribution? Up until the date of the suspension, the only contributions that were made were safe harbor contributions. After the suspension, the plan is required to fall back on the ADP/ACP test. Is it reasonable to take the position that the plan only received SH contributions for the year, and thus under 2004-13 the plan is still exempt from top heavy? I think the answer is no. I think once the plan is amended mid-year to suspend the SH contribution, the contributions that were previously made are no longer considered SH contributions for purposes of the safe harbor exemption from top heavy status. I could see, however, that one could argue that during the year the plan only received safe harbor contributions, and nothing else, and thus under 2004-13 the safe harbor exemption still applies. I could also see an argument that the top heavy contribution is only required for compensation paid for the portion of the year the plan is no longer safe harbor. Nonetheless, I think the best answer is that once the plan is amended mid-year to suspend the safe harbor, the plan is top heavy for the entire year. Issue 3. We know that a plan that does not give the SH contribution to HCEs nonetheless qualifies as a SH plan (provided all other requirements are met). In an ASPPA Q&A, the IRS said the HCEs who do not receive the safe harbor and who are not key employees are not eligible for the top heavy contribution. What if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs? Would the analysis here be different from the analysis in Issue 2? I think the answer here is yes, meaning the plan remains a safe harbor plan for purposes of the top heavy exemption even if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs. If the plan can give the HCEs nothing for the entire year and still be safe harbor, it should be able to give the HCEs a safe harbor contribution for part of the year and still be safe harbor.

If an employer fails to deposit a top heavy minimum contribution for a prior year, should form 5330 be filed and an excise tax paid. If so, it appears it would be shown as a prohibited transaction similar to late deposit of employee deferrals rather than a late required employer contribution under minimum funding standards.

There is a safe harbor plan that is top heavy. The plan also has a New Comp and wants to exclude 3 Non-Key employees from receiving a Profit Sharing. These Non-Key Employees are also HCE that are excluded from receiving the Safe Harbor Non-Elective. Can those individuals be excluded from receiving the 3% Top Heavy/Minimum Gateway OR do they have to receive a funding.

For top heavy account balance determination in a DC plan, are unvested amounts that are forfeited included when adding back distributions for participants who terminated during the year? For example, a participant with a total account balance of $10K, of which $9K is vested, terminates during 2017 and takes a distribution during 2017. Would you add back $10K or $9K? EOB gives an example that says, "the former employee's account balance must be included in the top heavy ratio" [my emphasis added]. I can't seem to find anything definitive in the Regs., but logically, it seems like you would add back what would have been the full value of the account (unvested portion included) since that's the amount you would include for someone who wasn't terminated.

Hello, My employer retirement plan is based on two employees. The owner and an employee. However, testing resulted in the owner being top heavy at 64%. However, they are a Safe Harbor at 4% as well as the prior year. My question, is there any additional requirement on part of the owner on contributions? Thanks

A sponsor is top heavy in the initial plan year (i.e. 2015). We accrue an end of year match to reduce the TH ratio below the 60% threshold that would in effect, get them out of top heavy for both the initial and subsequent plan years. They neglect to fund the match. During 2017 can they still fund the end-of-year 2015 match to reduce the TH ratio, or does that option go away and they now must fund the 2015 and 2016 3% top heavy allocation? Thanks for any input.

I administer a 401k plan (not SH) that will be top heavy in the current year (2017) based on last years valuation. Can the Employer amend the plan now for last year (after for the YE) and add a provision to make a discretionary matching contribution for 2016? With the additional matching funds deposited for 2016, the plan would not be top heavy in 2017 and all of the employees not deferring would not get a contribution. Any guidance would be appreciated. THANKS