Top Heavy 401(k) and early participation coverage issue

[Guest f1234]

A top heavy 401(k) plan has a permitted disparity allocation formula and a safe harbor match. The plan's entry date for salary deferral and for the safe harbor match is the first day of the month following employment. The employer's discretionary allocation requires the completion of age 21 and 1 Year of Service.

All employees, who have entered the plan, will receive at least the 3% minimum, either directly through an employer contribution, through the safe harbor match, or a combination of the two sources. The employer is also making a discretionary contribution to maximize the owner.

Of the employees, who met the age 21/1 Year requirement, 87% of the NHCE benefit under the permitted disparity formula. If the employees, who do not meet the age 21/1 Year are included in the ratio, coverage fails the percentage test, since they receive the top heavy only. Can this second group (otherwise excludable) be disaggregated for testing purposes? All of the HCE have met the age 21/1 year requirement.

[Tom Poje]

ah, lets clear some thing up.

coverage is only concerned about whether someone gets something or not, it doesn't matter how much.

so for purposes of coverage it makes no sense to say the ratio % fails because they received top heavy only. they still received something so they are still benefiting.

Now, what you are actually concerned about is "Is my integrated profit sharing plan still concerned safe harbor since the ratio percentage will fall under 70% if I exclude the top heavy only people."

well, that depends. If plan passes average benefits % test and the ratio % > safe harbor % then you pass nondiscrim an you are ok there as well. (I would try that first)

schedule T shows the % of all ees benefiting, (you do not exclude top heavy only people)

you could also try passing on an accrual basis, but that might require using the gateway minimum which would bump up the top heavy only people.

...................

You could test both coverage and nondiscrim splitting the groups into statutuory includable and otherwise excludable.

Sched T gets filled out twice[i mean you have to fill in the line item for a disaggregated group] . one at 87% and the other for the otherwise excludables (I assume at 100%)

That should eliminate the need for nondiscrim testing, though if you really wanted to run it, you should arrive at 87% ratio % test if you run things on an alloaction basis and impute disparity