Top Heavy Plan & Eligible Compensation

[Guest LWilson]

Two participants in a Top Heavy Plan must receive the 3% minimum for 2001. Although they had not met the hours requirement for the 2001 plan year, they had met eligibility requirements in a prior plan year.

As an aside, the standard employer contribution is 15% of eligible compensation, which is then allocated using permitted disparity.

Because my two non-keys will be receiving a 3% minimum, do they have what can be defined as eligible compensation for determining the employer's profit sharing contribution for the year? Do I include their compensation when I am calculating 15% of eligible compensation?

[Blinky the 3-eyed Fish]

Yes, compensation from anyone who benefits from any portion of the plan can be used to calculate the deduction limit.

[AndyH]

I personally agree with Blinky but I don't think this is universally accepted.

For one thing, in a safe harbor plan someone receiving only the top heavy minimum is treated as not benefitting for 410(B).

Second, I'm not so sure about the "any portion of the plan" part. Again, I think I agree but I know many other people who do not.

So, LWilson, I know for a fact that some people would not include the comp for the top heavy-only people.

[Blinky the 3-eyed Fish]

Andy, I think there is an argument for including compensation of a 401(k) plan participant that did not defer nor otherwise receive an allocation. I, however, cannot see any arguing whether or not to include the compensation of a person receiving a top heavy minimum.

An example to illustrate this would be a top heavy plan where the owner deferred and no profit sharing contribution is given. You could easily have a case where you had required top heavy minimum contributions that would not be deductible under the no-count-comp argument.

[Mike Preston]

Andy, can you point me to the cite for the top-heavy only participant in a safe-harbor plan not being considered benefitting for 410(B)? At this moment, I'm skeptical.

[Tom Poje]

an ee who receives a top-heavy only would be treated as benefiting for 410b because he received a contribution.

and noted as such on the 5500 schedule T.

However, if the plan is to be considered to have a safe-harbor formula (not to be confused with a safe harbor 401-k) then the top heavy people are treated as includable and note benefiting. If the plan can then pass 410(B) it is considered safe harbor. Otherwise, you will have to pass using the cross tested rules, because you now have two formulas, the regular one and a 3% for a second class of people.

see 1.401(a)(4)-2(B)(3)(vi)(D)(3)

once again 2(B) or not 2(B), that is the 'answer'...

[Guest LWilson]

I assume you are referring to a "design based" safe harbor . . . for instance, a permitted disparity formula?

I am clear that for purposes of reporting on the 5500 that everyone is lumped . . . at least that was how I interpreted what I had read . . . I am not clear as to where this separate testing would then take place, if not for purposes of the annual report . . .

[AndyH]

Tom, thanks for the help with the cite.

LWilson, check out the cite. It should be self explanatory.

Tom and I went back and forth on this issue a few months ago. There is a good discussion of this matter in the ERISA Outline Book. The version I happen to have copied is the 1998 edition, page. 7.172 (Chapter 7-Taxation Rules).

I think it basically says that in the case of somebody eligible to defer but not deferring, it is unclear if the person's comp is eligible to be used for the 15%, because it is unclear if he is a "beneficiary under the stock bonus or profit sharing plan".

And I would extend this question to somebody treated as not benefitting for 410(B) per the cite Tom referenced.

Mike, I just downloaded the ASPA brochure, and I'm looking forward to your session. Tom, I didn't see your mug shot this year??. I heard you did a great job last year.

[Tom Poje]

sorry Andy, I wasn't asked to give a talk this year. (Last year was quite a 'different' talk to say the least) But, the boss is going with a booth this year, so I guess I might catch you there!

[Mike Preston]

Andy, thanks for the plug. Hope to get a few minutes to talk with you at the ASPA Annual Conference. Come say hello, if no other place, at the PIX Booth (I have no clue where it will be located because this is the first year at the Washington Hilton; for the past umpteen years the conference has been at the Grand Hyatt.)

Anyway, let me come down firmly on the side of counting the compensation for all those who are eligible to defer in the 15% multiplier. Now, that is for 2001 and before. EGTRRA eliminated k contributions from the multiplier, which is now 25%. I believe that a logical interpretation of the rules for 2002 would exclude participants who received nothing in a plan other than their own deferrals from the 25% multiplier.

But this is a far cry from excluding people who actually receive a top-heavy minimum! That is an extreme view of the language of the regulations under 401(a)(4). Just becuase the 401(a)(4) rules give you some lattitude in the way the non-discrimination rules are applied to a subset of participants does not carry over to the 404 definition which is always expansive to take into account all plans of the employer. Read that cite again, it is merely a hypothetical construction. It has nothing to do with the regular application of 410(B) and it certainly has nothing to do with 404.

[AndyH]

Those are good points about 401(a)(4) and 410(B) having nothing to do with 404, but the point I was trying to make (as discussed in detail in the ERISA Outline Book-this isn't an issue I thought up) is that the 15% limit is based upon compensation of "beneficiaries under the stock bonus or profit sharing plan". The question is then who is such a person under 404?

Since there is no definitive guidance (that I know of), would the 410(B) definition be a reasonable possible interpretation? I never meant to imply that it is the only interpretation. But I do know that some people do rely on such an interpretation; call it a conservative approach.

And, thanks, I will absolutely stop by both booths.

[Mike Preston]

I see nothing wroing with the 410(B) interpretation being used for the 404 multiplier. We have been told over and over by the IRS that a participant that is merely eligible to defer is benefitting for 410(B) purposes. And the construct that we have been pointed to in the 401(a)(4) regs doesn't change that in any way.

[AndyH]

Not to beat a dead horse, Mike, but obviously that is a manditorily separate plan for 410(B). Some people eligible for deferral would not be benefitting for the profit sharing plan for 410(B), obviously.

But, I do agree with your conclusion. I was just trying to say that not everyone else does.

And I know that Ed Burrows did an Academy Alert in 1999 or so which touched upon this topic, and he referenced a 1999 PLR. But with a PLR as the primary authority, some would be more cautious.

[Guest LWilson]

Actually, it wasn't 404 or 410(B) I was concerned about in my original question . . . although I do appreciate everyone's thoughts, because it brought in elements I hadn't considered . . . . nevertheless . . .

I really want to know if, when I am calculating the employer contribution based on "15% of eligible comp," do I include the compensation of the top heavy 3%ers? The top heavy 3%ers will not be receiving the standard employer contribution, just their 3%, so I'm wondering if their compensation should be excluded when calculating the 15% of comp employer contribution.

[Mike Preston]

Yes, it should be included. There is no question about that at all in my mind.