Safe Harbor-Past Top Heavy

[BTH]

A small employer who has maintained a Top Heavy Profit Sharing Plan for a number of years decides that he would be better off with a Safe Harbor 401(k), using the Basic Matching contribution. While starting in 2002, Safe Harbor plans using the basic match are not subject to Top Heavy minimums, are there issues since he has been Top Heavy in the past if:

1. He terminates the existing Profit Sharing Plan and establishes a separate new Safe Harbor 401(k)?

2. He amends the existing Profit Sharing Plan into a Safe Harbor 401(k)?

Any comments or observations would be appreciated.

BTH

[R. Butler]

Probably better just to amend the existing profit sharing plan. It is my understanding that as long the only contributions to the plan for a given year are safe harbor contributions meeting provisions of 401(k)(12) or 401(m)(11) the plan won't be considered top heavy for that year. If you terminate the plan the profit sharing plan you must provide for 100% vesting.

If the employer makes contributions besides the safe contribs., then the plan would still be subject to top heavy requirements.

[KJohnson]

I have an employer considering the same thing as BTH. As to amending the plan, has anyone heard anything more (formally or informally) on the the "consisting solely of" language for satisfiaction of top-heavy for a safe harbor matching plan.

As an alternative, does termination of the prior top-heavy plan and implementation of a matching 401(k) safe harbor work? While the plans would be in a required aggregation group, there would be no top-heavy obligation for the terminated plan and the newly established plan would satisfy top heavy through the matching safe harbor?

[R. Butler]

KJohnson

I haven't seen any guidance recently on the "consisting soley of" requirement. I have asked several other administrators, attorneys, etc. and I get different answers. We are running up on 12/31; I hope we get guidance soon.

As to the second part of your post, if we are worried about the discretionary contribution provision, couldn't we still merge and provide in the merged document that there would not be a profit sharing contribution. We avoid the vesting problem that way.

[KJohnson]

With a merger I think you still have the issue. Although there would not be an ongoing profit sharing contributions allowed under the plan, the "old" profit sharing contributions would still be in the plan--So you are back to the same question--Does the plan consist "solely" of a CODA and matching contributions.

If the the term "plan" means the document as opposed to the assets of the plan, I am not sure that you could draft a new document that eliminates all reference to the profit sharing contributions that remain in the plan.

That said, I think it is only logical that it should be a year by year test based on whether the employer actually makes a profit sharing contribution. However, I guess we have to wait for the guidance.