Matching Contributions and 410(b).

[Guest Thornton]

Many of our clients are interested in using matching contributions to satisfy the top heavy requirements, particularly in safe harbor plans. I understand that for top heavy, non safe harbor plans, the employer must make an additional contribution for any participant not participating in the 401(k) plan or receiving a match of less than 3% of compensation.

Wouldn't this also apply to safe harbor plans? If a safe harbor plan uses the safe harbor match, and only 4 of 6 NHCE's defer, doesn't the employer need to make the minimum 3% contribution for for the 2 non-deferring employees? Thanks.

[R. Butler]

See §613(d) of the Act. It appears that a plan consisting soley of elective deferrals and the safe harbor matching contribution would not be considered top heavy.

[Guest Thornton]

Thanks. Next logical question: Can I convert an existing top- heavy 401(k) plan containing regular matching and p/s contributions to a safe harbor matching only plan for 2002?

[Tom Poje]

Lets be careful out there....

the new rule regarding top-heavy applies to plan years begining 1/1/2002 AND

'the term 'top-heavy plan' shall NOT include a plan which consists

SOLELY of -

(i)...401(k)(12).... [ADP safe harbor ], and

(ii) ...401(m)(11)..... [ACP safe harbor]

emphasis mine. in other words, it looks like if additional contributions are made you have lost the free pass on top heavy.

You are correct. You can not convert an existing 401(k) until 2002.

[Guest Thornton]

Thanks for the response. If an existing top heavy 401(k) profit sharing plan is converted to a safe harbor matching only plan effective 1/1/02, do the p/s contributions prior to 1/01/02 require that top heavy minimums continue to be made? Thanks.

[Tom Poje]

hmmmm. I hadn't thought about that. I could be wrong on my following comments .....

I hadn't read it that way. the way I read it is based on a year by year basis. In other words, if a plan chooses not to allocate a safe-harbor for a given year (e.g. instead of safe harbor match, they make a discretionary match), then they would have to provide a top-heavy minimum.

[R. Butler]

I agree with both of Tom Poje's previous repsonses, but I will say that most of the commentaries I have read suggest that if a plan contains a safe harbor it meets top heavy. The commenatries don't seem concerned with additional employer contributions. I don't know why that is.

[Guest Thornton]

Effective, 01/01/02, an employer sponsors a safe harbor matching contributions only plan. The plan is therefore not considered "top heavy". Owner defers $11,000 in 2002 and receives the safe-harbor match. Six NHCE's defer nothing. We're ok for top heavy purposes, but do we have a 410(B) coverage failure. I'm sorry to keep pressing this issue, but it just seems too good to be true.

[R. Butler]

As long as an employee is eligible to make deferrals he/she is treated as benefitting, even he/she doesn't actually defer. If the NHCE's are eligible and just choose not to make deferrals, I don't see a 410(B) problem.

[Guest Thornton]

Thanks. I must have experienced a senior moment!