Top heavy and safe harbor nonelective contribution

[Guest Dolores Lawrence]

Plan is top heavy. Safe harbor nonelective contribution is 3% times compensation since mid-year entry. No other contributions are made and there are no forfeitures. Under Rev Proc 2004-13, is the plan deemed to satisfy top heavy?

[Brian Gallagher]

No. The free pass only applies to plans with the SH match (and only if the SH match are the only other contribs).

However, once the plan is deemed as top heavy, the 3% contribution satisfies the top heavy minimum contribution.

[Archimage]

That is incorrect. EGTRRA changed that rule that basically says that any plan that consists solely of safe harbor contributions gets a free pass.

[Tom Poje]

EGTRRA added the following:

Code Section 416(g)(4) was amended by adding new subparagraph (H):

The term ‘top-heavy plan’ shall not include a plan that 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.

Note, it says 'and' rather than 'or'

so, does a plan that only provides a SHNEC satisfy this requirement? In the post the example used was ees who entered midyear. the 3% they received would be insufficient because it is not based on full year comp. Does the plan get a free ride on top-heavy since those were the only contributions?

I would say yes, if the plan provides a discretionary match, because that would satisfy (ii), because the discretionary could be 0. If the plan does not contain language for a match, then, who knows. Technically it would be impossible to satisfy condition (ii) I have yet to figure out how the IRS thinks in some areas.

If the plan exercised the 'otherwise excludable' option then no, the plan does not get the free ride on top heavy, and would have to provide additional contributions.

[Guest DFerrare]

Tom,

I think the 'or' you're looking for is in 401(m)(11)(A)(i).

David

[Tom Poje]

Dave: this is really strange, must have gone into Benefits Link the exact moment you posted or something. its odd to read a response before being notified there is a response!

anyway, I know the 'or' is in that paragraph, which reference the safe harbor for the ADP test. But if that stood on its own, then a SHNEC would satisfy the ACP test, which it doesn't. The way I understand that to be read is that before even getting to the ACP safe harbor you have to pass ADP safeharbor, which is done with either the SHNEC or the SHMAC.

401(m)(11)(A)(iii) adds to meet safe harbor ACP must meet the following limitations for the match bleh bleh bleh

but then maybe I am reading too much into it.

[Guest DFerrare]

I don't think it says the SHNEC can satisfy ACP either. My point was that 411(m) recognizes that ADP can be satisfied with the SHNEC as well as with the SH match, and the SHNEC is enough to satisfy both 401(k)(12) and 401(m)(11), even if there is no mention of a match in the plan.

Anyway, that's what I want it to say because I don't think it makes sense to only give a free pass on top-heavy with the SH match.

[Tom Poje]

with that we agree

[Guest Dolores Lawrence]

I find it interesting that 2 paid technical assistance services haven't responded to my emails or faxes on this question. Also left a message for the guy who wrote Rev Proc 2004-13 - no response to my question. In the meantime, my pension software churned out top heavy warnings on 2 plans with the same situation. I'm inclined to think that the IRS couldn't possibly have meant to give the safe harbor free pass only to those plans with the safe harbor match situation.

At least some people responding to this link have been kind enough to express an opinion. Thanks.

[Tom Poje]

that just goes to show you how muddy the waters can be. ANd how unsure people are on the issue.

I have actually thought about the issue some more.

the code says you have to satisfy both

401(k)(12) and 401(m)(11)

now, to pass 401(m)(11) you have to pass 401(k)(12)! You can't have a plan that passes ACP safe harbor and not ADP safe harbor.

or put another way, if passing ADP safe harbor was sufficient, why not simply say the exemption is for 401(k)(12) alone, or 401(k)(12) OR 401(m)(11).

On the other hand, they could have said pass 401(m)(11)!!!!!

so, a plan provides absolutely no option for a match. I would hold that there is no ACP test, hence it doesn't satisfy ACP safe harbor since none exists. There is no rule I know of that says "A plan with no match automatically passes ACP test" as for example "A plan with no HCE automatically passes".

I thought of some other examples involving non safe harbor plans.

A plan with deferrals only, no language for a non elective contribution, still has to provide a top heavy if a plan is top heavy and a key employee deferrals - even if there are no other nonelectives.

Up until a few years ago, a frozen top heavy DB plan had the same requirement. you had to provide for something even though 'nothing' else existed to require it.

(Personally I wish you had heard back from one of the technical assistance services and could enlighten us, but there lack of response would seem to say

"we don't know, either")