Top Heavy allocation and use in 410(b) test

[Guest hog4you2]

I have a 401(k) Safe Harbor Match (Basic) with non-standardized integrated profit sharing (1000 hour/employed requirement) plan. There are 7 ees, all have been participants for at least 2 years. Two Key/HCEs (owner-spouse) and 5 NHCEs. All 7 deferred more than 4% of salary, hence match >4%.

However, only owner worked 1000 hours, rest over 500.

Owner wants to "max-out" in Profit Sharing. Since the PS contrib negates the use of the SHMatch towards Top Heavy, I must 1st allocate 3% to the Non-keys, then the rest towards the PS (in this case, the owner only).

Does the top heavy PS contrib qualify as "benefitting" in the 410(b) test for the Non-Keys, or must they receive the regular PS allocation formula to be considered "benefitting"?

Thank you,

Dana Regan

[Blinky the 3-eyed Fish]

This is a recurring question here.

First, in discussing the nonelective portion of the plan, anyone who receives a nonelective contribution is considered benefiting under this portion of the plan. Sources of nonelective contributions are PS, top heavy minimums, safe harbor nonelectives, QNEC's. So under that thought, all are benefiting in your case.

But, now with the NHCE's getting 3% and the owner getting much more, what you have is a allocation that is not a safe harbor. There is a special rule that allows you to treat those receiving only the TH minimum as not benefiting. This rule is designed to preserve the safe harbor status of the allocation formula. In this case though, it would just mean that you fail coverage testing miserably. Your document may have language on this that REQUIRES you to do this, so check it.

So back to if you are able to treat them as benefiting, then you don't have a safe harbor formula and must pass general testing, which will then require you to give at least the gateway amount, or more depending on how the testing works out.

[Guest hog4you2]

Thanks, Blinky.