If a safe harbor 401(k) p/s plan allows discretionary p/s contribution

[Guest Thornton]

Our firm has been debating this issue for some time, keep getting different answers and don't even agree amoung ourselves! Can anyone help?

If a safe harbor 401(k) p/s plan allows discretionary p/s contributions, is the plan exempt from the top heavy rules in a plan year the basic match is made and no p/s contribution is made?

Example: A plan provides for safe harbor matching contributions and discretionary p/s contributions. The company has made p/s contributions in the past and will again in the future. However, they will not make a p/s contribution for 2002. A participant didn't defer in 2002. Does the company need to give her a 3% top heavy minimum?

Thanks.

[Guest kowen]

Off the top of my head, I believe EGTRRA changed the top heavy rules so that a plan that makes safe harbor matching contributions would not be considered top heavy.

[2muchstress]

At the IRS Q&A at ASPA in DC, the IRS agent opined that if a plan consisted of only 401k and safe harbor contributions, the plan would not be considered top heavy for that year. However, if forfeitures were reallocated, then that could cause a top heavy minimum to be required.

We have had the same debates in our firm, and I believe that it was really unclear at first. But the ASPA Q&A from October is the most recent that I have heard anything on the issue.

[Guest hpaine]

I've always thought that when you have a traditional Safe Harbor plan in place that it would pass testing automatically. However, when you add in the p/s contribution, the p/s money is tested outside of the SH money.

[2muchstress]

hpaine- generally speaking, you are correct. However the original post was in reference to top-heavy contributions. The top heavy determination is a test of existing balances as opposed to testing a contribution for discrimination. Safe Harbor balances still need to be considered when calculating a top heavy percentage, and if the plan is top heavy and there are additional contributions other than the safe harbor, then a th min. would need to be made.

If the plan consists solely of deferrals and safe harbor contributions, and no additional profit sharing or forfeitures are allocated, the th min is not required, but the top heavy status should still be determined because it could have an impact on the plan sponsors decision making.