top heavy safe harbor plan with forfeiture reallocation

[MR]

A safe harbor 401(k) plan consisting solely of deferrals and safe harbor match is deemed to be not top heavy. What happens if there is a forfeiture to be reallocated? Are we now not deemed not top heavy? This issue has been discussed before, but I don't know if its been resolved. My client uses the safe harbor match, so having to bring everyone up to 3 percent is kind of a big deal.

any insight?

[Belgarath]

If it consists solely of the deferrals and safe harbor match, how are there forfeitures? I thought these had to be 100% vested in order to qualify as a safe harbor under 401(k)(12)?

[MR]

it was a profit sharing plan before converting to safe harbor 401(k).

[Mike Preston]

I certainly haven't seen anything on point. Here is IRS Q&A 28 from the October, 2002 ASPA Annual Conference:

28. Presume a business maintains 1 plan that has a mix of 401(k) deferrals, matching contributions & profit sharing contributions. If in 2002, the only contributions are deferrals and a 4% (dollar for dollar) safe harbor match, would this plan be considered top-heavy if key employee balances exceed 60% of plan assets? i.e., does the presence of a profit sharing option preclude use of the new rule deeming safe harbor plans not top heavy? What if in addition to the above, previous forfeitures get reallocated? The thing that is throwing me is the exact wording of EGTRRA: “The term top-heavy shall not include a plan which consists SOLELY of a CODA which meets the requirements of 401(k)(12) & matching contributions with respect to which the requirements of 401(m)(11) are met.”

What exactly is meant by the word "SOLELY"? No other contributions in that plan year? No other contributions permitted?

A: This is an issue that is not resolved. Look for guidance by the end of the year.

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Well, I haven't seen any guidance. Has anybody else?

[Tom Poje]

I haven't seen anything, but based on what the regs say I would say you have become top-heavy again.

A similar scenario exists if you want to put into an IRA, if I recall correctly if you receive only forfeitures you still suffer the consequences.

Heck, (in the future) use forfeitures to reduce plan expenses.

[Belgarath]

I would say it now becomes top heavy. I interpret the "solely" requirement quite literally, absent any additional IRS guidance.

[2muchstress]

This would be the perfect time to amend the document to say something like forfeitures may be used to pay administrative expenses of the plan. Any forfeitures not used to pay administrative expenses of the plan will........(reduce future contribution, reallocated, etc. etc.).

Atleast this way, you will never have to deal with the issue again. If there are forfs in a future year and the plan consisted solely of safe harbor contributions and deferrals for that year, you don't necessarily have to reallocate the forfs.