EGTRRA Top Heavy Safe Harbor

[kocak]

The new rules say "The term top-heavy plan shall not include a plan which consists solely of - (i) a cash or deferred arrangement meeting 401(k)(12), and (ii) matching contributions of 401(m)(11).

Query: Does a plan that has a profit sharing feature, but no profit sharing contributions, satisfy these requirements?

I'm trying to determine if my existing safe harbor plans were designed in error because we checked the profit sharing feature on the adoption agreement.

Since the statute says 'consists solely of a 401(k)(12) arrangement', I'm thinking that if a plan has a profit sharing feature, even if never used, it will not meet these requirements, and then may be considered a top-heavy plan.

Sal Tripodi's newsletter indicates that "a safe harbor 401(k) plan is deemed to be a non-top-heavy plan if the only contributions to the plan fall into ... 401(k)(12) and 401(m)(11)." This seems to me that a plan with the profit sharing feature could still be considered non-top-heavy.

I haven't seen anything else written about this topic. Any input is greatly appreciated.

mck

[AndyH]

I'm not sure of the answer. Just wanted to throw my name into the ring of people interested in this very good question.

MGB, can you help with this one?

[MGB]

This sounds like one that needs Treasury/IRS guidance. I am unaware of their looking at it or realizing it is an issue. I'll add it to a list of "need guidance" in communications with them.

[kocak]

Thanks. I appreciate your time and assistance.

michele

[Guest dubya]

As it is written, I would interpret it they way you did, that by merely having a profit sharing feature in the plan, you do have a "top heavy eligible (??)" plan.

However, from the many, many write-ups that are out there on how EGTRRA came to be, it seems pretty clear that this is NOT what was intended. The intent was to relieve plan sponsors of a top heavy contribution obligation if the only contributions into the plan were 401k/match. I suspect the wording for this came out not exactly the way it should. I'm sure Brian Graff at ASPA can confirm what the intent was. I agree that clarification from the government should/will be forthcoming.

[Guest wendycatherine]

FYI: the following comes from the ANNUAL PENSION ACTUARIES AND CONSULTANTS CONFERENCE:

Q28. Presume a business maintains 1 plan that has a mix of 401(k) deferrals, matching contributions & profit sharing contributions. If in 2002, the only contributions are deferrals and a 4% (dollar for dollar) safe harbor match, would this plan be considered top-heavy if key employee balances exceed 60% of plan assets? i.e., does the presence of a profit sharing option preclude use of the new rule deeming safe harbor plans not top heavy? What if in addition to the above, previous forfeitures get reallocated? The thing that is throwing me is the exact wording of EGTRRA: “The term top-heavy shall not include a plan which consists SOLELY of a CODA which meets the requirements of 401(k)(12) & matching contributions with respect to which the requirements of 401(m)(11) are met.” What exactly is meant by the word “SOLELY”? No other contributions in that plan year? No other contributions permitted?

A: This is an issue that is not resolved. Look for guidance by the end of the year.

[AndyH]

Which conference, ASPA 10/2001? If so, time is up.

[Guest merlin]

I've heard that Jim Holland and Dick Wickersham disagree, which ,if true, is probably the reason for the lack of guidance.Wickersham takes the Tripodi position. Holland takes the more stringent position that the plan document can't allow ps conrtributions.Maybe it's the operational discretion Jim objects to.

MGB,can you confirm or deny?Meanwhile,the world waits.

[MGB]

Without something official from the IRS to the contrary, I'd side on caution and follow the letter of the law (Holland's approach). As long as there is disagreement internally at the IRS, we will probably never get anything from them.

[AndyH]

There was just a webcast a couple of days ago by ASPA, "Top Heavy under EGTRRA". It was scheduled for 7/23/2002. Anybody sit in on it? Was this stuff addressed?

[Guest merlin]

It was only mentioned to point out the difference of opinion between Jim and Dick.But wrt MGB's comment about following the letter of the law,how many t/h s/h 401(k) plans are out there that don't have ps language in them? I would expect that they are exterely rare.And of those that do,how many are being run in accordance with Dick's interpretation? Probably most. If MGB can impress this notion on The Powers That Be, it would be most appreciated by TPAs all over the country.If Jim's view prevails I think we'll all be spending a lot of money - our's not our clients' - on EPCRS.