Top Heavey 401(k) New Comparability Concerns

[MBCarey]

I am really struggling with the new comparability regulations. I have a medium size plan with 21 HC & 128 NHC. The plan is a top heavy integrated 401(k) plan with a 3% match.

The trustee would like to use a $125,000 profit sharing contribution and maximize it for the HC's. Being this is a 2002 plan scenario, the match is being utilized to help satisfy top heavy and then the remaining part of the 125,000 is allocated.

I have used the spread sheet provided by Fred Payne to calcualte the Gateway and it appears to pass, I am just real concerned that I am not satisfying top heavy.

At it stands now the highest HC is receiving a contribution of 2.34% overall and the lowest NHC percentage is .77%. A participant who made no deferral is receiviing a 3.11% contribution. the 2.34% + .77%.

This just doesn't seem to make sense in my brain. Any advice would be appreciated. Hope I don't totally confuse everyone with my lack of knowledge.

Thanks

[Tom Poje]

well now, you said a mouthful.

assuming that the HCE = key ee as well, then all non keys would have to get at least 3% (match plus profit sharing) for 2002.

I am also assuming that at least one of the key ees is getting over 3% in deferral + match + profit sharing.

The spreadsheet is very useful, but remember, it is not designed to check for top heavy

[MBCarey]

The HC with the highest percentage is getting 3% match + 2.34% overall profit sharing contribution. The lowest NHC is getting 3.00% match +.77% profit sharing. The participant who did not defer is getting a 2.34% TH plus .77% profit sharing. This just does not sit right with me. I am sure I am missing something.

Since the HC's are all receiving the 3% match, does that mean that my TH contribution has to be at least4% and not the 2.34% that the HC's are getting as a profit share.

[MBCarey]

The HC with the highest percentage is getting 3% match + 2.34% overall profit sharing contribution. The lowest NHC is getting 3.00% match +.77% profit sharing. The participant who did not defer is getting a 2.34% TH plus .77% profit sharing. This just does not sit right with me. I am sure I am missing something.

Since the HC's are all receiving the 3% match, does that mean that my TH contribution has to be at least4% and not the 2.34% that the HC's are getting as a profit share.

[Tom Poje]

actually, it doesn't really matter what the key ee is getting in match or profit sharing if he deferred over 3%.

You indicated that an HCE received at least 3% in deferral + match + profit sharing.

Therefore, the top heavy minimum is 3%, so an NHCE could receive, for instance 2.5% match and .5% ps under the new rules.

You indicated an HCE received 2.34% profit sharing, so all NHCEs would have to receiva at least 1/3 of that or .78%. That has nothing at all to do with top heavy, but rather, the minimum gateway, which is something different.

Thus an NHCE who received 3% has satisfied top heavy requirement, and, since the 3% is greater than the 1/3 requirement for the gateway, the NHCE is ok.

[AndyH]

You are confusing a number of issues. Slow down.

First, top heavy has nothing to do with HCEs. Key employee is the critical term here.

One of the first things is that you need to determine if the plan document states that key employees get top heavy minimum contributions or not.

Top Heavy minimums are limited to 3%. You don't have to give anybody 4% on account of top heavy.

So, under any scenario within the context you've described, yes, each Non-Key employee must receive at least 3%. You need to check and see how the document treats Key employees.

Regarding cross testing, yes you then need to determine who the HCEs are. Under the situation you've described, each NHCE must get at least 1/3 of the percent alloction given each HCE. But, the match does not count towards this. Forget the match for cross testing. There you focus only on the profit sharing contribution.

Hope this helps you sort things out a little better.

[KJohnson]

Just so I am clear, I thought there was one exception that would require 5% where "ordinarily" you would contribute 3% for top heavy.

1) Using the 5% gateway in a plan with 1000 Hours requirement for an allocation.

2) Participant who does not work 1000 hours but who is there on the last day gets 5% allocation rather than 3%.

I guess this is really a gateway issue rather than a top heavy issue although top heavy is the only reason the individual is getting a contribution in the first instance.

[MBCarey]

Thanks to both of you for now. I think you have helped to clear things up in this mixed up brain.

First, I will make sure that TH is satisfied. I will check the document for sure, but I do not beleive the keys received a TH allocation. Then with the remaining amount allocate the profit sharing contribution with the Gateway coming into play.

I think this may be what I have done, but I did not take into consideration that the match the HC's received was at 3%. Instead I was trying to spread only the 2.34% as a Top Heavy contribution.......

Thanks for your patience, I know I am very confused...

[Tom Poje]

that would be my understanding, but I would word it slightly different...

if an individual is eligible to receive a nonelective contribution, he is entitled to the 5%.

so an ee who gets top heavy would receive an increase, also

an individual who receives a 3% SHNEC is increased to 5%

an ee who was eligible to defer(immediate entry), but if there was a 1 year wait for profit sharing would not, unless the plan was top heavy.

actually, my logic says it should be increased to 1/3 of the HCE if that value was less, it is just that all the examples I have seen use 5%.

[AndyH]

KJohnson, I'm not following your questions completely.

But, yes, the gateway is either 3/1 or 5%, but with the dollars in this example, there is no way everybody would get 5% so I left that part out.

MBCarey, your allocations will be tricky. You will have to follow your document regarding the top heavy, match, and discretionary provisions, in terms of which step to follow first. Your document probably doesn't have the gateway rules in it, so that won't be so easy. In the end, you'll just have to make sure the gateways are satisfied. But, don't forget, this is a 2002 issue so by then your document should provide you with some direction in terms of how to do the allocations in what order.

[KJohnson]

Andy H I agree the 5% would not be applicable to this situation.

I was just responding to your statement that "Top Heavy minimums are limited to 3% " which seemed like an absolute.