Safe Harbor and top heavy

[Guest philc]

A Safe Harbor 401(k) consisting only of deferrals and the safe harbor match do not need to test for top heavy. However, a S-H plan consisting only of deferrals and the SHNEC does not automatically satisfy top heavy.

Can you explain the rationale for this? Granted the SHNEC can be used to satisfy the t-h minimum but why subject the SHNEC plan to t-h testing, when the S-H matching plan gets the pass? Seems like more participants would be getting a minimum contribution under the SHNEC than under the matching method.

[WDIK]

I am either misinformed or misunderstand your post.

A 401(k) plan that consists only of deferrals and safe-harbor contributions (either matching or nonelective) is exempt from the top-heavy requirements.

[Guest philc]

That was my interpretation too but 416(g)(4)(H) states

The term 'top-heavy plan' shall NOT include a plan which consists solely of

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

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

Does that mean only S-H "Matching" plans get the automatic pass?

[WDIK]

I think that the answer is in 401(k)(12).

[Tom Poje]

I have seen that in the regs, and agree a strict interpretation of the regs says a plan has to have a contribution (s) that satisfies both ADP and ACP. my best way around it is for the plan to have a discretionary match, and the match is always zero. But a discretionary does satisfy safe harbor match ...well I guess if it is limited to 4% of comp, etc..

would the IRS push the issue if there was no document language for the match? I doubt it...because the 3% SHNEC will satisfy top heavy anyway, so it becomes a moot point. But I do like the train of thought that caused you to ask the question.

[Guest philc]

Last one - but what if the S-H plan using the SHNEC uses comp. for the first year from the date of participation and is top heavy. Doesn't the t-h minimum have to be based on the entire year's comp.?

The reasons for subjecting the nonelective S-H plan to t-h testing yet giving an automatic bye to the S-H matching plan is beyond me.

I guess the solution would be as you suggested - a discretionary Match - just don't make it.

[Mike Preston]

Yes, TH is based on the entire year.

[Brian Gallagher]

This doesn't explain why one type of contribution gets a free pass and the other doesn't, but it does illustrate why using the SHNEC doesn't completely "correct" the Top Heavy status.

TH plans must have a minimum vesting schedule. Say Plan XYZ had P/S contributions (but wasn't TH) in 2000, 2001 & 2002 and the P/S money is on a 7-yr graded vesting schedule.

In 2003, the plan is TH and it adopted a SHNEC. The plan is still subject to TH testing (no free pass). Though the SHNEC satisfies the minimum contribution, that is only part of the "correction". The vesting schedule still needs to be accelerated by one year.

Using the SH Match, the plan is conisdered NOT TH, therefore no accelerated vesting is needed.

So you can't just say, I made my NEC and that's all I need to do.

At least that's the way I read it.