safe-harbor 401(k) / top-heavy

[kmciver]

I have a top-heavy safe-harbor 401(k) plan. The plan says that employees are eligible quarterly after 90 days of service. This is the same for deferral and employer contributions. The plan also says that the eligible employee for safe-harbor excludes those ee's who have not meet max age and service req.

We've allocated the non-elective safe-harbor contribution to employees that are in the plan and have meet the 21/1. There are several newly eligible employees who've never work 1000 hrs that did not get the contribution.

Does this satisfy top-heavy if this is the only contribution to be made to the plan?

Thanks

[Tom Poje]

question #1

were there any other contributions besides deferrals and safe harbor?

If the answer is no, then your opening statement is incorrect.

you have a safe harbor 401(k) plan, but it is not top heavy.

[Archimage]

Correct me if I am wrong but I believe the disaggregated portion (EEs that haven't met 21/1) will still need to receive the top heavy minimum.

[kmciver]

Situation #1 - They are not going to make additional contributions.

I wanted the answer you gave, but I was under the impression that a plan not top-heavy only when a safe harbor matching formula was used.

Situation #2 - They make additional contributions.

If this is the case I think all participants get a TH contribution, right?

This gets more confusing every day. K

[Archimage]

Since the plan is top heavy, you must give the 3% TH minimum to all employees. This is an additional contribution other than the SH contribution. Since an additional formula is used, you would need to make sure that all participants are receiving the TH minimum.

[Tom Poje]

kmciver:

EGTRRA said

the term 'top heavy plan' shall not include a plan which consists solely of

"(i) a cash or deferred arangement which meets the equirements of section 401(k)(12), and

..............

to meet this, a plan can offer either the SHNEC or the SHMAC, not just matching contributions.

...............

(ii) matching contributions with respect to which the requirements of section 401(m)(11) are met

...............

there is a lot of matching stuff that meets this, but a SHNEC would never. note, one of the matching features that would satisfy this would be a discretionatry match = 0. Interesting, a strict reading of the reg would say the word 'and' requires both. If you had a plan with a SHNEC only (no match language at all), then you would appear to fail this. And yet if you had discretionary match language that you never used, you would be ok.

..................

as to the disaggregated portion, I hadn't thought about that before. I have always read 'plan' to mean the whole thing, regardless if I disaggregate the otherwise excludables or not. Otherwise would I just look at the otherwise as a separate plan and test just that portion for top-heavy?

[Archimage]

The entire plan would be subject to TH minimum since the safe harbor election is not the only formula involved. You now have an additional top heavy formula involved for a portion of the participants.

[R. Butler]

Do you have a cite for that Archimage? EGTRRA §613(d) seems pretty clear that if the plan consists solely of deferrals and safe harbor contributions it isn't top heavy. I don't see anything in §613(d) that makes this rule different for Plans that exclude "otherwise excludibles" from the safe harbor contribution.

[Archimage]

I found my information in the ERISA Outline Book 2002 edition, CH. 11, p.379. Sal references 416© and 416-1, M-10.

[R. Butler]

Archimage,

Thanks. Clearly Mr. Tripodi does say as you suggest. I'm not sure I necessarily agree, but he is 50 times more knowledgeable than I will ever be.

It would seem like an unintended result. The employer could have just excluded the "otherwise excludibles" from deferring and avoided the whole situation. Employer doesn't get a benefit by letting employees defer quicker (other than possibly retention).

[Tom Poje]

Interesting. There was an earlier thread (probably well over a year ago) that talked about having document language that had immediately eligibility for deferral, 1 year wait for profit sharing and the language excluded otherwise excludables from top heavy and it received a determination letter.

I'm still waiting for a new copy of Sal's book, so I can't comment on the 2002 edition. (The edition I have is pre EGTRRA and the top heavy argument makes sense)

M-10 says 'non-keys who participate in a top-heavy plan...'

so which comes first the chicken or the egg?

The plan is safe harbor, and makes only deferrals and safe harbor contribution. therefore it is not top heavy, thus M-10 doesn't apply.

or

because you are using the otherwise excludable option, you have a portion of the plan that is not safe harbor. therefore the free

pass on top heavy does not apply to that portion of the plan. so the argument is that you have to provide top-heavy.

hmmm. I still don't know.

Q-10 of notice 2000-3 says if you use the otherwise excludable option, you treat them as separate plans under 410(B). T-7 of 416 says if you pass 410 then you don't have to aggregate for top heavy. But does that apply in this case???

[kmciver]

Archimage,

Are you saying that eEven if you don't make the ps contribution

[R. Butler]

What the ERISA Outline Book (and I think Archimage) are saying is that a safe harbor that excludes "otherwise excludibles" from the safe harbor contribuiton is not a Plan that consists "soley of a safe harbor 401(k) arrangement." Since it does not meet the "solely" requirement, EGTRRA §613(d) does not apply. Therefore the entire plan is top heavy. Whether or not a profit sharing contribution is made is irrelevant, because the Plan already doesn't meet the requirements of §613(d).

[Tom Poje]

so the issue hinges on the term 'solely'.

the question used to be, what if the plan has a profit sharing option but doesn't use it. and, at least at the ASPA conference in 2002 the IRS said if there is no ps the plan is not top heavy, end discussion.

now, you are saying, if the plan uses otherwise excludable option, it is no longer 'solely'. why?

again, I simply don't know one way or the other. And again, I will point to Q-10 of 2000-3 that says

A plan that uses one of the safe harbor methods (I could read that as 'consists solely of...' it is not required to provide the safe harbor to those ees [who are otherwise excludable]

Thus, a plan that exercises this option is still in itself safe harbor even though nothing was given to the other group. And if no other contributions are made then EGTRRA says it is not top heavy.

[Gilmore]

Corbel has an interesting piece that came out last week in their Pension News, Technical Updates section. It is entitled, "Minimum Gateway and Safe Harbor Minimum Contribution Requirements (3/13/2003)".

It discusses the effects of having early eligibility for deferrals but statutory requirements for the Safe Harbor Contribution, on both a top heavy plan and a cross tested plan.

The article mirrors what is in the ERISA Outline Book as far as the disaggregated portion of the plan no longer being a Safe Harbor plan, and thus making the plan subject to top heavy minimums (and ADP testing; an HCE that is disaggregated for the Safe Harbor minimum would be tested in the disaggregated group).

[R. Butler]

Do you read that Corbel update to say that in a Safe Harbor 401(k) situation the top-heavy minimum would only apply to the "otherwise excludibles"? I read that update, but I didn't even connect the safe harbor issue with the top heavy issue.

The ERISA Outline Book is fairly clear in its position that the whole Plan would be Top Heavy. Again I don't necessarily agree, but it does seem to me that it is all or nothing. Either you meet §613(d) or you don't.

[Gilmore]

I saw the Corbel piece as support to what I was reading in the ERISA Outline book. Like an "IF/THAN" kinda thing. Since the plan is now two plans it no longer is just a safe harbor plan and thus is subject to top heavy minimums for everyone who is benefitting (not just the "excludable" plan) as mentioned in the ERISA Outline.

And R, you are correct that the ERISA Outline is pretty emphatic that the top heavy minimum would be provided to all participants.

It would be nice if the Outline had a code section or Q&A to back up that argument.

And I would be very happy to hear if anyone is taking a different view in their practice.

At this point the only plan we have that uses such provisions also uses the 3% nonelective and works to the benefit of the employer as there are some otherwise excludables who met the initial eligibility and without the disagraggation would be receiving a safe harbor contribution despite the fact that they terminated during the year. The plan is top heavy but since they did in fact terminate during the year they received no employer contribution. And all of those in the non excludable group received their 3% through the Safe Harbor contribution.

Please let me know if you disagree.

[R. Butler]

I attended an ALI-ABA Spring Update Video Conference yesterday. I e-mailed them this question. Marjorie Hoffman with the IRS fielded the question. She indicated that in this situation the Plan would be top-heavy. Although I did ask whether the top-heavy minimum would only apply to the disaggregated portion, she did not specifically address that.

[Mike Preston]

She didn't address it because she didn't need to address it. The whole darn plan is top-heavy. Period.

People who have designed a SH 401k plan with disaggregation for those who don't meet 21/1 are out on a limb if the plan is TH.

While an argument can be made that the "plan" for SH purposes consists of only those who meet statutory eligibility (and hence you retain SH treatment of the 401k plan), there is no question that since the overall plan is TH the minimum contribution must be met somehow for all participants, even those who do not meet statutory eligibility.