Top Heavy Test & Safe Harbor Plan

[doombuggy]

I have a plan that contributes a match, profit sharing and a 3% safe harbor. We do not run the ADP/ACP tests because of the S/H, and ran the Top Heavy test this year (which they fail, but b/c of the safe harbor, it's ok). The company is questionning the excluded balance of an employee. This plan is a calender year plan, and the employee was key in 2001. While he is still an officer in 2002, and owns more than 1% (but less than 5), he does not meet the salary requirements for the 1% and officers tests, so he is now a former key. His balance was excluded from the t/h.

My question is: When I run the top heavy test at the end of the 2003 plan year, will he still be considered a former key, and thus his balance is excluded, or will he become a non-key employee, and his balance included in the test? We have looked at the 2002 ERISA book and the 2000 Pension Answer book and cannot get a definitive answer. Does anyone know how this will be handled? Thanks for your help!

[jaemmons]

If the match satisfies the ACP safe harbor, then you don't need to run top heavy as the plan is exempt from top heavy.

However, for other plans which run across your situation, you are correct that the former key ee's account balance is disregarded for th determination, but they are still counted for th minimum allocations.

[Blinky the 3-eyed Fish]

Jaemmons, a plan is exempt from providing the top heavy minimum is it's a safe habor 401(k) plan and that is the only contribution for the year. It doesn't sound like that is the case here.

Also, what do you mean when you say the former key's balance is still counted for TH minimum allocations?

[jaemmons]

Blinky,

If this plan's matching formula satisfies the ACP safe harbors, then the plan is exempt from top heavy (as it is only providing safe harbor contributions under IRC 401(k)(12) and 401(m)(11)). This assumption is made based upon "doombuggy's" statement that the plan does not run adp/acp testing and make the 3% nonelective for adp safe harbor purposes.

Also, I was stating that former key employees are still counted for any top heavy minimum allocation, as they are still nonkey's for this purpose. Their account balance however, is disregarded for top heavy concentration % determination purposes, unless they become a key ee in a future plan year.

[Blinky the 3-eyed Fish]

I understand now what you were saying in your last paragraph.

But regarding the top heavy, a plan is exempt from TH if the safe harbor contribution is the ONLY contribution other than deferrals. This is the quote from Doombuggy, "I have a plan that contributes a match, profit sharing and a 3% safe harbor."

[jaemmons]

Blinky,

There is an assumption being made on my part that the match satisfies the safe harbor under 401m11. If this is the case, the plan consists solely of safe harbor contributions under 401k12 and 401m11 which would allow for the plan to be exempt from top heavy.

If the matching contribution does not meet the safe harbor requirements under 401m11, the plan would be subject to top heavy determination and compliance.

[Blinky the 3-eyed Fish]

I agree with your last post, although it doesn't apply to Doombuggy's situation where he clearly says that his plan does not satisfy the requirements to be exempt from TH.

[doombuggy]

We have run top heavy testing on this plan in the past, as it has been a safe harbor plan since 1999. They match throughtout the year, along with the safe harbor. At year end, they usually do a profit sharing contribution. They had a subsidiary corporation, which the person that I menion above met the salary requirements mentioned in my post (he got paid by both companies). Now the subsidiary company is gone, so he was not making the $$$.

My question is: When I run the top heavy test at the end of 2003, will he still be considered a former key (given that he does not pass the officer or owner test menioned in my first post), or does this designation only last for one year?

The client is ansking me and i cannot find an answer anywhere. Thanks for your help!

(Miss) doombuggy

[Tom Poje]

once former key always former key it is not a one year deal- well, I suppose one could magically turn back into a key ee if they are an officer and their comp went high enough or if they became an owner.