Top Heavy Test and 3% Safe Harbor Plan

[sloble@crowleyfleck.com]

We have a design-based safe harbor with a 3% employer contribution to all employees. We have no matching contributions. OUr profit-sharing contribution is 100% vested. We are a partnership.

If our plan is top-heavy, will we automatically meet the remedy (of a 3% employer contribution to non-key employees) due to the 3% safe harbor contribution? This contribution appears to go only to non-keys because the partners do not get a 3% contribution and I think only partners could be considered keys.

I assume we will not meet the remedy due to the profit-sharing contribution because that goes to everyone (including partners).

THANKS!

[WDIK]

If I follow your post correctly, the plan satisfies the top heavy minimum contribution requirement since all non-key employees are receiving a 3% employer contribution. This is true whether or not the key employees get the 3%contribution. Apparently the plan document indicates that the top heavy contribution only needs to be made to non-keys, and you have satisfied that requirement.

[Archimage]

I think I follow the post a little differently. It sounds like there is an additional profit sharing contribution other than the 3% SHNEC. If this is the case then you don't get a free ride on the top heavy minimum. However, since everyone is getting a 3% contribution anyway you probably won't have any problems. The only problem you may have is for someone that entered the plan after the beginning of the plan year. You would then have to make sure they received a 3% contribution for their full year's comp.

[sloble@crowleyfleck.com]

THANK YOU--Ok now I have a little more information-- any additional thoughts greatly appreciated.

I realize that we have to test for top heavy because we have discretionary profit sharing contributions every year (rev rul 2004-13 clarified this) The 3%SHNEC is made to all employees and partners. I think we can just rely on the 3%SHNEC to satisfy the top heavy minimum contribution requirement in all cases.

ARCHMAGE/anyone else: Tell me what you think: I don't think we have to worry about making a top heavy minimum contribution for new hires because under our plan, to be a "participant" for purposes of elective deferrals and SHNEC, you need one year of service. (for the profit sharing contribution its 2 years) Thus, there is no one who is eligible to participate who is not also eligible for the SHNEC. So I think this works.

Final question: Asuming that the SHNEC works to satisfy the top heavy minimum contribution, do we even need to test or document that we tested and remedied in any way? I mean if we are meeting the remedy every year, I don't see what we really need to do.

[Tom Poje]

There is one possible exception I can think of - you did not make it clear what the 3% was based on. If it was based on date of entry and the ee entered midyear, then you will have to bump that person up with additional contributions.

Top Heavy is based on total comp for the year, regardless of when the person entered.

[sloble@crowleyfleck.com]

ohhh! I think I see your point. Under the plan, only compensation earned while the employee is a participant is considered for purposes of the 3%SHNEC--and the employee becomes a participant after a YOS. Please consider the example below to make sure I follow you.

EXAMPLE: Non-key Employee commences employment on April 15, 2003. He gets one year of service by April 15, 2004 and becomes a participant on the July 1 2004 entry date. He then gets a 3%SHNEC for the compensation he earned from July 1 to December 31 2004. If the plan were top-heavy in 2003, then that Employee should get an additional contribution equal to 3% of his compensation earned from Jan 1 to June 30 2004.

Does this cover the only "gap" you can think of with respect to using the SHNEC to cover the top heavy minimum contribution?

Are there any documentation requirements that you know of that we should be doing with respect to treating the SHNEC as the top heavy contribution, or when we bump up a new participant's contribution to meet the top heavy minimum?

Thanks!!

[Tom Poje]

since the document should contain top-heavy language, all you do is bump up the contribution to cover top-heavy (though the SHNEC would be 100% vested and the remainder subject to the vesting schedule.)

If there are no other forfeitures or contributions(only safe harbor contributions made) , then I think it is unclear whether the plan gets a free ride on top heavy or not.

[sloble@crowleyfleck.com]

maybe I don't understand correctly, but I don't think we get a free ride on top heavy because we have discretionary profit sharing contributions and reul 2004-13 makes it pretty clear we have to test for top heavy. All of our contributions are 100% vested, so we don't have to worry there.

Does my previous post jive with your understanding of who might fall through the cracks in relying on our shnec to satisfy the top heavy contrib?

THANKS VERY MUCH!

[Tom Poje]

yes it jives. I was merely pointing if there are no other contributions it is a bit hazy on how to handle things.

[sloble@crowleyfleck.com]

thank you, Tom I appreciate your help