Early 401(k) Participation - Top Heavy Minimum Required?

[Guest jvanheyde]

If a top heavy, 401(k) Profit Sharing Plan allows employees to participate immediately (after one hour of service) for purposes of making 401(k) salary deferrals and rollover/transfer contributions, but requires one (1) year of service and attainment of twenty-one (21) (plus quarterly entry dates) in order to enter the plan for purposes of receiving a profit sharing contribution and/or matching contribution, does the plan have to make a top heavy minimum contribution before the employee enters the plan for purposes of the profit sharing and/or matching contribution. To me, Reg. Sec. 1.416-1 does not answer the question, at least not clearly, whereas Code Sec. 410 makes it clear that you can treat the early entry 401(k) employees as a separate group.

[R. Butler]

Minimum contributions must be provided to all participants. The employee became a participant when he/she became eligible to make deferrals.

[Guest jvanheyde]

Do you have a citation to support your response? Is it not possible to provide an employee is a participant for one feature of the plan on X date, and a participant for another feature on Y date? If a plan permits an employee to immediately make a rollover or direct transfer, is that employee not regarded as a participant at least for purposes of the rollover account? If he/she is a participant for that purpose, would logic say he/she must receive a minimum in a top heavy plan, even if he/she has not entered the plan for profit sharing purposes.

The policy of 410 is to let people start deferring ASAP and not keep them on the sidelines for a year or 18 months. The policy appears to be defeated if you are correct if the plan is top heavy.

[R. Butler]

1.416-1, M-10 provides the rule that partcipants still employed on the last day of the year receive the top heavy minimum.

An employee becomes a participant when he/she is eligible to defer, regardless of more restrictive requirements for other employer allocations. I am sure there is a cite for that, but I don't know it off the top my head.

You may want to try to Search the board for a cite. I am sure this topic has been discussed before.

[david rigby]

R.Butler is correct.

Consider if the original situation were 2 plans instead of two features within one plan. Top-heavy testing would require that you aggregate the account balances in the two plans to determine if the "aggregation group" is top-heavy. Then, if so, one top-heavy minimum benefit would be required, either in one plan or divided between the two (plan provisions controlling). Both plans would be required to use vesting at least as generous as the T-H schedule.

Caveat: the previous statement assumes the two plans constitute an aggregation group due to common Key Employees. If that is not the case, then using separate plans might be beneficial.

[E as in ERISA]

I don't know if there is a cite to prove they are not excluded -- this might be one of those cases where the answer is based on the fact there is no cite authorizing one to exclude them. In his ERISA Outline Book, Sal Tripodi has an example very similar to this case. He concludes that an employee who is eligible for the 401(k) portion but not the matching and profit sharing contribution is entitled to a top heavy minimum allocation. But he doesn't provide a cite (which suggests that there may not be a direct cite). When you have multiple forms of contributions and different eligibility requirements, the main way to avoid this is to have separate plans (and that doesn't work in all cases).

[mbozek]

I am not sure that I understand the question. Under Reg. 1.416-1 Answer M-20, elective contributions by key employees are taken into account for determining the top heavy minimum but contributions by non key employees dont count toward the TH minimum contributions. Answer M-10 states that non key ee who are participants in a DC plan must receive the TH minimum contribution even if they fail to complete 1000 hr of service if they are employed as of the end of the year. Therefore non key employees who are eligible to participate in a 401(k) plan are eligible for the 3% TH contribution whether or not the participant is eligible for a contribution under the PS allocation. See M-1. By making the ee immediately eligible for participation in the 401(k) plan the er is required to give each non key ee employed at the end of each year a minimum TH contribution.

[Tom Poje]

see also an earlier thread regarding the ASPA Webcast Q and A on the New Comparability Regulations (8/1/2001)

not sure when the thread would be.

the 6th Q and A

If a 401k has dual eligibility and the plan is top- heavy, do those eligible only for deferrals (who are getting the top-heavy minimum) now have to get the 5% [gateway minimum]...

A. The preamble makes it clear that short-service employees may be excluded from the minimum gateway, although they are still required to receive the top-heavy minimum.

Of course, Iwould add, in that case, you are required to test the plan in two parts.