Top Heavy and ADP/ACP Rules

[Guest dhoefer]

We have a client that wanted to implement the safe harbor plan for 2002, however it was too late so he is implementing a traditional 401(k) profit sharing plan in 2002 and amending it to a safe harbor plan for 2003. His concern is how much the HCE’s will be able to contribute to the plan this year. Is there any relief for the HCE’s in the first plan year? I think there is, but am not sure. In addition, how is the ADP/ACP testing completed? The effective date of the plan is 10/1/02, so is the testing based on the whole years income or just the past few months AND/OR how is the Top Heavy testing come into play?

thanks.

[Tom Poje]

guess a lot depends on how the document is worded.

since it is the first year of a 401(k), assuming language is in the document, the NHCE would be 3% in the prior year, so the HCEs could defer 5%.

Now, 5% of comp from the effective date or 5% of total comp?

could be either (obviously you can't defer on $ before the effective date) but the testing could be based on a 12 month period. see 1.401(k)-1(g)(2)"...use comp for the plan year or the calendar year ending within the plan year"

of course, if the key person defers the big bucks, then you are going to be stuck with the 3% minimum top heavy for 2002.