Does Key EE Catch-up contribution trigger top heavy contribution?

[Lori Foresz]

Hi,

Plan fails ADP and entire amount of deferrals will be returned to the KEY HCE. The KEY is over age 50. Plan is top heavy.

Can the KEY HCE retain 3,000 of the excess contributions as her 2004 catch-up or would this trigger a top heavy minimum contribution for the staff?

Help is greatly appreciated.

[WDIK]

It is my understanding that catch-up contributions do not trigger a top-heavy minimum contribution obligation, but they are taken into account in determining whether or not the plan is top-heavy.

See Code Section 414(v)(3).

[austin3515]

Although it's true that your key could leave catch-ups the Plan w/o triggering a THM, you better make sure that you don't have a THM because the key made contriubtions in the first place in excess of the catch-up limit, even though they were refunded. I just went through the top heavy regs and didn't find the answer. Maybe the ERISA Outline Book?

[Tom Poje]

The question implies that the NHCEs deferred 0, therefore the plan had to refund all the deferrals and there were no other contributions, so plan would not have a top heavy minimum.

strange, or at least poor plan design. why bother with the plan in the first place.

Or at least make it a safe harbor with a match, owner gets everything as long as the NHCE is not deferring.

I guess conceivably you have a plan in which only catch up contributions would be made every year. Interesting. and no top heavy required if that is all the owner does AND the NHCE never ever ever ever defers so all HCE deferrals are treated as catch up.

WDIK: current year catch ups are not used in determining if plan is top heavy. Only prior year catch ups are used. strange reg.

[wmyer]

Some questions out of interest -- Are you using prior year testing or current year testing? Is the NHCE ADP really zero? Is this a first year plan?

[Lori Foresz]

I guess I poorly phrased my question. The plan is top heavy so the owner is not contributing. However, we thought she could at least put in a 3k catch-up if it doesn't trigger a top heavy minimum contribution for the staff.

There is some Non-HCE participation but not much. Does this scenario change the fact that a catch-up does not trigger a TH minimum contribution to Non-Keys? Thanks everyone!

[austin3515]

It does because now not all of the contributions will be catch-ups - some of them will be true deferrals, which means that the key employee did benefit as far as top heavy is concerned. Therefore, (TOTAL key deferrals minus deferrals reclassified as catch-ups) divided by key's compensation = top heavy minimum contribution (as a % of pay) for all NHCE's who are employed on the last day of the Plan Year (assuming they met the Plan's eligibility requirements). No 1,000 hour requirement can be imposed.

[pmacduff]

Her $3,000 is not considered catchup until the end of the plan year when you run the ADP and it fails. Any amount up to $3000 removed from the test to pass can be recharacterized as catchup. So it is possible that the owner could end up with "regular" deferrals which could trigger a top heavy.

[Lori Foresz]

Thanks again. I think I am getting it. The only way a catch-up could not trigger a top heavy min is if ALL of the deferrals were reclassified as catch-up in order to pass the ADP test, which would mean the max allowable deferral of the HCE group would be zero, which would mean zero participation by NON-HCE. But, if any of the HCE deferrals are allowable deferrals, that amount would trigger a THM.

Sound right? Thanks again

[Blinky the 3-eyed Fish]

Keep in mind that it's not just an ADP failure that causes deferrals to become catch-ups, a plan imposed limit will do the same. You could just amend the plan to provide that HCE's are limited to a deferral rate of 0% and allow for catch-ups. Then all your deferrals are catch-ups and TH is not triggerred.