401(k) deferrals in top heavy plan make contributions exceed 415 for g

[Guest MEGary]

Here are the facts:

Top heavy 401(k) profit sharing plan

plan year is 10/1/01 - 9/30/02 (they want us to do a projection)

participant has contributed 23.61% of compensation

top heavy minimum contribution is 3% of pay - which if you add this to the 401(k) % is 26.61% of pay - that exceeds 25% for the year.

the document states that any amounts contributed in excess of the annual additions must be held in a suspense account and allocated in the next plan year. now this isn't talking specifically about top heavy contributions - it's talking about employer contributions in general.

my question is this - doesn't an employee HAVE to receive the top heavy minimum? - i.e., 401(k) would have to be refunded in order to make sure that the employee received the 3% top heavy minumum? let's say you put this money in a suspense account, what happens if they terminate employment and don't received the amounts in the suspense in the following year.

my problem is - there is nothing in the document that addresses this.

any info, sites or additional questions would be appreciated!

[RTK]

A couple of comments.

A top-heavy plan must provide a top heavy minimum contribution to eligible non-key employees. Thus, if your participant is an eligible non-key employee, a top-heavy contribution must be made. Note that (1) the top-heavy contribution percentage does not have to exceed the highest percentage of compensation contributued on behalf of a key employee (provided that the plan is not included in an aggregation group that permits a db plan to satisfy 401(a)(4) or 410) and (2) elective contributions made by key employees are treated as employer contributions to determine the required minimum contributions, but the elective contribtutions made by non-keys are not so treated.

Most plans specify that excess 415 annual additions are to be first corrected by returning elective deferrals (and earnings) to the participant. This appears to be permissive under the Regs. Thus, your plan may in fact not provide for this order of correction. If this is the case, and assuming that the participant is a non-key employee (so that a top-heavy contribution is due and elective deferrals cannot be taken into account), there would be no choice but to credit the participant's elective deferrals to the 415 suspense account. If that amount is not ultimately allocated to the participant (say because of termination), it would be allocated to other participants (or returned to the employer if the plan were to terminate and the amounts in the 415 suspense account could not be allocated to participants). Have you thought about amending the Plan to specify the desired correction method?

[Guest timeout]

Is the plan year and limitation year the same? Probably yes, but ...

What definition of compensation are they using for the (k) election? If they have any exclusions to comp for deferral purposes you may get a higher 415 comp ...

What does the doc. provide in order for a particpant to cease deferrals? Granted it is elective, but if 'next pay period' this may help ...

Agree with the prior post re: 415 return hierarchy.

[Blinky the 3-eyed Fish]

Timeout, 415 compensation is not influenced by the definition for deferral purposes. In other words 415 comp is 415 comp - gross compensation.

[Mike Preston]

Blinky, I think that is exactly what Timeout was saying, unless I misunderstood his/her comment.

[Guest timeout]

Right, I was offering the plan doc. may have comp exclusions for the (k) deferral election (e.g. exlcudes bonuses) - that then may otherwise need to be added back to come up with 415 comp - and if this type of difference, the annual addition percentage mentioned above should decrease.

[Blinky the 3-eyed Fish]

Okaleydokaley A number 1 shazaam!

[Mike Preston]

(hehe)