Testing - Highly Compensated and Top Heavy

[Guest jstout2507]

I believe I understand the Highly Compensated testing and how it is calculated. If you fail this test, then the highly compensated employees have to give money back so their total contributed percentage is within the calculated percentage is should be. Is there any other penalty involved or do the highly compensated just get money back? (Highly compensated now being more than $85,000 per year or more than 5% ownership.)

For the Top Heavy test, I have a number of questions.

1. When selected which employees go in which category, do the same rules apply above for highly compensated, or is it different? I thought it was different and only owners of the company are in the highly compensated bracket in this calculation.

2. The HC employees must not own more than 60% of the total assets. Is this just for the plan year or for the all the assets in the plan to date?

3. Are the assets in this test considered just the amount employee has deferred, or that and the vested amount of the employee match, or that and also the non-vested amount of the employee match so everything in that employee's fund?

4. Finally, what is the penalty if you fail the test? I think it has something to do with the company having to match 3% across the aboard to all eligible employees. For simplicity sake, let's say there are two owners who are deferring the max of 11,000 plus their 50% or 3% limit match so that's $33,000. There are 10 employees making 30,000 each and deferring 4% with a 2% match so their total is 18,000. Total assets 51,000. The owners have more than 60% of the assets. Test failed. What would happen from here. How much additional needs to be paid to each employee and is it vested 100% or does it go through the vesting schedule of the plan. Are there any other penalties involved?

Thanks

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HCEs do not necessarily have to give the money back for failing ADP/ACP. The company could give do a few things such as a QNEC contribution in order to get the test to pass.

Your other questions:

1. HCEs are not used for top heavy. You use key employees v. non-key

2. All assets in the plan including distributions in the lookback year.

3. It is all assets no matter if they are currently vested or not.

4. If a plan is top heavy then every non-key has to receive a 3% contribution. Matching contributions can satisfy this for post-2001 plan years. However, if anonkey ee is getting a 2% match, the company will have to provide an additional 1% contribution to bring him up to the 3% requirement. It uses the vesting schedule of at least a 6 yr graded.