Safe Harbor 401(k) top-heavy if profit sharing contributions also made?

[Guest Hilarion]

Until now I thought it was received wisdom that a 401(k) automatically passed top-heavy for all contributions if a safe harbor NEC (or also, now, safe harbor match) is made to the plan. But I've read some things recently hinting that such a plan might be top-heavy if contributions other than deferrals and safe harbor contributions are allocated.

Can anyone clarify this? Thanks!

[Archimage]

That is correct. Anything made above and beyond the safe harbor contributions, then you will have to do top heavy testing.

[Guest Greg W]

If the client is using a "safe-harbor" match and they allocate additional contributions, the match no longer satisfies the top-heavy requirement. I don't know the specific code source but I'm sure someone else will chime in with that.

If they are using the NEC the plan still meets all the top-heavy requirements.

[Guest Bob K]

Greg - question for you.

If the plan has a semi-annual entry and uses the safe harbor NEC but only counts compensation from the date of participation will it still satisfy top heavy?

Example: DOH = 6/30/02 DOE = 7/01/03 PY = 12/31/03

Since the 3% NEC is only for the period 7/01/03 - 12/31/03 then on an annualized basis this is only 1.5% of pay. Is top heavy still satisfied?

Thanks in advance for your input.

[Guest Greg W]

good catch. If the plan is actually top heavy you have to look at annual comp. The point in my original reply (and on of the more seasoned pros may correct me) was any contributions made above and beyond the safe harbor contribution you can use the SH NEC to satisfy top-heavy. with the presence of other employer contributions you cannot use SH Match and satisfy the top-heavy requirement.

[Archimage]

That is incorrect. If your plan consists solely of safe harbor contributions then you are exempt from top heavy testing regardless of any entry dates.

[Archimage]

Greg, I may have misunderstood your post. If a plan has a safe harbor match and additional nonelective contributions, then the matching contributions can be used to help satisfy the top heavy minimum. I am not sure if that is what you were trying to say.

[Guest Hilarion]

Please tell me is this is a correct summary of the responses to my inquiry:

1. A safe harbor nonelective contribution satisfies top-heavy, even if there are additional contributions (profit sharing, match).

But there is some question as to whether full-year comp or entry-date comp makes a difference.

2. A safe harbor match does not necessarily satisfy top-heavy if there are additional contributions.

[Archimage]

Let me clarify.

1. If your plan consists solely of safe harbor contributions then you get a pass on the top heavy. These contributions would be based on the plan's definition of compensation. You can use comp from date of entry.

2. If you have contributions in addition to your safe harbor contributions then you have to satisfy top heavy. In order to give everyone the top heavy minimum you can use match and/or profit sharing contributions. The top heavy minimum would be based on a full year's comp.

I hope this clarifies.

[Guest Hilarion]

Thanks, it does.

Someone should warn the unsuspecting sailor on the pension seas about the shoals at the mouth of the safe harbor.

[Guest Greg W]

Archimage,

this is how I understand the safe harbor rules. If a plan is top heavy and the client wants it to be safe harbor and they want to contribute a myriad of employer dollars (match, non-elective, profit share) the employer cannot use the safe harbor match to satisfy the top heavy requirement. They have to use the safe harbor non-elective to satisfy top-heavy.

Is this right or not?

thanks

[Archimage]

That is incorrect. All matching contributions can now be used to help satisfy the top heavy minimum. This was added under EGTRRA 613.

[Guest Greg W]

Thanks for the help.

[Guest mkimball]

The way I am explaining this to clients is as follows:

If a plan is safe harbor, either the nonelective or the match or enhanced match, the top heavy "rules" are still applicable but the top heavy "funding" requirement is waived for the plan year the plan was safe harbor. The ADP test is deemed to pass and maybe the ACP test also if within guidelines.

If employer desires to make a nonelective (profit sharing) allocation in addition to the safe harbor contributions, then I believe the IRS has announced (maybe unofficially) that "in that year" if regular nonelective contributions are allocated in addition to the safe harbor contributions, then the temporary waiver of top heavy contributions is NOT waived. That was the interpretation they gave to the "solely consists of " language in EGTRRA that exempted safe harbor plans from top heavy funding.

However, since the match and the nonelective contribution together will be applied against the top heavy minimum, it should not be a major issue. There may be a few folks in the top heavy minimum who did not get the safe harbor allocation or the profit sharing allocation, there may still need to be some contributions but it should be relatively small. The top heavy minimum goes to participants employed at end of year and is based on compensation for the entire plan year, regardless of comp used for other purposes.

[Tom Poje]

one additional point -

if the plan does not provide the safe harbor to 'otherwise excludable employees' then the top heavy freebie ride is negated as well.

[Reluctant Actuary]

Safe harbor matching contribution may be used to satisfy the top heavy minimum. Relying on Treas. Reg. §1.416-1, M-19, the IRS concluded that the ADP safe harbor matching contribution could not be used to satisfy the top-heavy minimum contribution. See VIII.C.2. of IRS Notice 98-52. However, EGTRRA §613 amended IRC §416(c)(2) to overrule §1.416-1, M-19, and allow matching contributions (even safe harbor matching contributions) to be used to help satisfy top heavy minimums for plan years beginning on or after January 1, 2002.

Not all participants will get match (or get enough match). Remember that some participants won’t get the safe harbor match (i.e., they don’t defer) or their matching contribution will not be enough to satisfy the entire top heavy minimum contribution liability. In such case, the employer will still need to make additional contributions to satisfy the top heavy minimum contribution, unless there are other allocations otherwise made for such participants to take care of the liability, or the deemed non-top-heavy rule under IRC §416(g)(4)(H).