Top Heavy Correction--Wrong Compensation Defn

[sloble@crowleyfleck.com]

Client has "satisfied" top-heavy contribution for past 3 years via 3% nonelective safe harbor contrib. However, it has been using a definition of compensation that excludes OT and bonuses (not a 415 definition). What is the appropriate correction?

Plan also has a discretionary profit sharing contribution after 2 YOS--can we look to that to make up the "deficiency"? (then we would only have folks with less than 2 YOS with an improper calculation)

[austin3515]

All contributions count so it does sound like your limited to people w/ less than 2 years. I'm not clear though on whether you imposed the 1,000 rule. Did you know that is not allowed for the top heavy minimum? You can have a last day rule though.

With respect to the people who were shorted because of the definition of comp, the correction is to give them what they should have gotten (i.e., the difference) and adjust it for earnings. See the IRS correction program in 2003-44, which I think has a section on failing to provide the THM.

I don't think your allowed to self-correct under the program if it's over a year old, which just means that the IRS can give you a hard time for not submitting the correction under the walk-in programs if the Plan was audited. It's obviously very expensive to do a submission to the IRS, so the sponsor will probably opt to self correct anyway.

[Tom Poje]

If the number of bodies who did not receive enough for top heavy is small, and that the actual amount involved is small, etc...that would sound like an insignificant operational failure (see Part IV section 8 of the self correction program)

therefore you should be able to correct (provide additional contribution plus any gains to those who were missed)

all this assuming that you have met all the other requirements such as have a determination letter, etc.

you possibly have a discrimination issue - e.g. you have some ees who received 3% SHNEC plus additional profit sharing and a group of ees who will receive 3% top heavy only, plus a definition of comp that may or may not pass the 414(s) compensation test. assuming the number of bodies that are top heavy only people and have more than 1 year of service is less than 30%, then nondiscrim shouldn't be a problem.

[sloble@crowleyfleck.com]

Thanks for the helpful replies. We have a GUST favorable letter, and I'm thinking its insignificant so SCP is the way to go. Our definition of compensation (barely) passed 414s. I have to check on the 1,000 rule and I'm a little unclear on the 30% nondiscrimination test.

Tom: Would you mind clarifying: "assuming the number of bodies that are top heavy only people and have more than 1 year of service is less than 30%, then nondiscrim shouldn't be a problem." THANKS very much.

[Tom Poje]

Ashley:

suppose you have 1 HCE and 10 NHCEs.

all have more than 1 year of service, so there is no testing 'otherwise excludables separately' The SHNEC was 3% and the additional profit sharing was 6%

further suppose that 2 of the NHCEs have more than 1 year but less than 2 years of service, and are therefore not eligible for the profit sharing. 2 of 10 NHCE is 20%, which is less than the 30% figure I mentioned.

This means you have 1 HCE at 9%, and 8 of 10 NHCE at 9%. this would pass the ratio % test of nondiscrim.

But suppose instead 5 of 10 NHCE had between 1 and 2 years of service.

This means you have

1 HCE = 9%

5 NHCE = 9%

5 NHCE = 3%

rate group test would fail since more than 30% of the NHCEs have a smaller benefit.

Avg ben % test (5* 9) + (5 * 3) = 6.00 for the NHCEs

HCEs = 70% * 9 = 6.30, so you would fail avg ben % test if test is performed on allocation basis (without imputing disparity)

possibly would pass on an accrual basis, but then you have the gateway minimum to worry about, and that may be a problem based on your definition of comp.

[jaemmons]

Tom,

For 401(a)(4) purposes, if an employee has not met the 2 year requirement for profit sharing purposes, why are you counting them in the rate group testing?

[jaemmons]

Nevermind Tom, I figure out why.