401(k) top heavy exception

[Guest wcoleman]

We have an existing top heavy 401(k) plan that is considering a change to a safe harbor match beginning 1/1/04. The employer will cease to make any further discretionary profit sharing contributions.

Since the plan has accumulated balances in the employer discretionary profit sharing source, can they qualify for the top heavy exception?

[KJohnson]

Generally the informal guidance is yes, but watch out for your forfeitures. Allocation of forfeitures from the profit sharing portion of the plan could "blow" your top heavy exception.

[david rigby]

This is Q&A 2003-35 from the Gray Book:

QUESTION 35

DC Plans: Safe Harbor 401(k) Plans, Top-Heavy Exemption

If a plan that is intended to be a safe harbor 401(k) plan also provides for a separate profit sharing contribution (which may be discretionary), does the 401(k) part of the plan lose the exemption from top-heavy under Code section 416(g)(4)(H), as added by EGTRRA? Does it matter whether a profit sharing contribution is actually made or not under the profit sharing provision for a given year?

RESPONSE

If a profit sharing contribution is actually made, the top-heavy exemption is lost. The exemption does apply if there is no actual profit sharing contribution. The safest course of action is to have two separate plans.

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