Top Heavy Coverage Test

[blue]

I have a top heavy plan which has deferrals, 3% non-elective safe harbor and integrated profit sharing – entry dates for the safe harbor and deferrals are monthly after one month of service and the profit sharing monthly after twelve months of service.

The employer hired several new employees who were eligible to defer and receive the safe harbor non-elective, but not the profit sharing. Since the plan is top heavy the new employees required an additional contribution for the one month they were held out of the safe harbor contribution.

When I add the tiny additional top heavy minimum employer contribution Datair spits out a special top heavy report stating I am failing the 410(b) minimum coverage test – 401(a)(4) Top Heavy Safe Harbor.

The verbiage on the report is as follows -

Top heavy plans using a 401(a)(4) safe harbor formula (e.g. proportional to salary or integrated) with participants who are not eligible for the employer contribution effectively have two formulas and must pass a special ratio percentage test where those who benefit only form the top heavy minimum are treated as not benefiting.

Is anyone familiar with this report????

[Archimage]

I think the software/report is written incorrectly. Normally when top heavy minimums come into play, you can treat those receiving top heavy minimums only as not benefitting and if you pass coverage then you don't have to run the 401(a)(4) nondiscrim test. In your case they are benefitting even without the top heavy minimum. Since the NHCEs (I am assuming this is the case) are the only ones receiving an additional contribution as a result of the top heavy minimum, you should pass 401(a)(4) easily. Now if you have some HCEs receiving the TH minimum my answer would change.

[blue]

Not exactly sure what you mean.

Here is my situation

3 HCE receiving the full profit sharing contribution

6 NHCE receiving the full profit sharing contribution

5 NHCE receiving only the necessary profit sharing contribution to bring them up to the 3% (one months salary – the time they were excluded from the safe harbor contribution)

Are you saying the software is incorrectly including the 5 NHCE who received only the necessary additional 3% as not benefiting? Why would they be considered benefiting? Is it because they received the safe harbor contribution?

I would not pass the gateway test because I could not meet the 5% gateway.

Any thoughts would be appreciated.

[rcline46]

Get rid of the TH contribution, post the Gateway. Now (probably) no one needs a TH and so the situation just goes away!

[blue]

I do not have a cross tested plan. I cannot just give them the gateway contribution. They are not eligible for the profit sharing contribution.

[Tom Poje]

you say you 'do not have a cross tested plan'.

I would say there is no such thing as a 'cross tested plan.

There are plans with an allocation which,

because the allocation is considered to be non safe harbor, they are cross tested to prove nondiscrimination.

so lets look at your facts.

3 hces received x%

6 Nhces received x%

5 NHCEs received less than x%.

since only 6/11 NHCE received the same % as the HCEs, you do not have a safe harbor formula.

If it helps, you have a plan with two groups or classes. one group received x% and the other received less than x%.

therefore, you have to prove the plan is not discriminatory.

you might pass testing on an allocation basis if you impute disparity, especially if your plan is not integrated.

if not, then you either have to cross test and provide the gateway to the 5 NHCEs (and still pass testing)

or put in a corrective amendment and increase the contribution to one or more NHCEs to pass testing on an allocation basis.

[R. Butler]

1. If the plans can pass the average benefits tests assuming a 0% allocation rate for the 5 NHCE's receiving only the top heavy minimum wouldn't the plan still be considered to have a uniform formula? (Maybe not likely, but still should consider if this correct.)

2. I have had this issue a couple with prototype documents. Do most prototypes contain language allowing you just to bump up for the gateway? I haven't seen it. I haven't seen tack on amendments provied either that would allow it.