Top Heavy 403b's

[Guest ronny890]

Hello,

My brother and I run a small 501 c 3 and have 403b in place. 5 of 12 employees use the 403b by way of salary reduction. However, we would like to contribute company monies to the "participating" 5 employees(ERISA), no one else including ourselves. These contributions would be gauged on annual salaries, eg. 10% of the annual salaries.My brother and I would make up 65% since our salaries are higher. I read that top heavy does not apply to 403b's. I also read and was directed by Fidelity and other that there is NO problem here. I am just concerned with the imbalance of monies to the "key" employees. Help.

[Guest mjb]

Neither top heavy rules or nondiscrimination rules apply to salary reduction contributions to a 403(b) plan. If no employee made more than 100k in 2005 then you could limit employer contributions to those persons who contribute to the 403b plan since the plan has no highly compensated employees. If you cant meet this requirement then you need to consult a tax advisor for advice on complying with the non discrimination rules for employer contributions. Alternatively, the employer could increase the pay of those employees who you wish to make contributions for and they could increase their salary reduction contributions and avoid the nondiscrimination rules since each employee can contribute at least $15,000 in 2006. Only down side to this approach is that salary reduction contributions are subject to 7.65% FICA tax whereas employer contributions are exempt from FICA tax on employer and employee. In otherwords, the 10% employer contribution will be reduced by 0.765% , to 9.235%.