Safe Harbor and top heavy free ride

[Tom Poje]

from the Western Benefits Conference:

in response to the question

What if a plan uses comp from date of entry, and only offers a SHNEC?

The IRS response was that the plan needs to make a top heavy contribution. I think Craig Hoffman's jaw hit the floor. He respectfully disagrees.

(This is the opposite of the response at the 2005 ASPPA Fall conference)

The IRS agent then agreed that clarification would be coming sometime in the future.

I'll have to look through my notes and see what else I've got to share, but after being gone a week I have one or two or three or...things sitting on my desk to do.

[Trekker]

Isn't this because top-heavy contribution is based on 415 comp, which is always for the full year?

[Tom Poje]

the issue is as follows:

The term ‘top-heavy plan’ shall not include a plan which consists solely of –

(i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), [ADP safe harbor] ]AND

(ii) matching contributions with respect to which the requirements of section 401(m)(11) [ACP safe harbor] are met

the plan is question provides no match.

therefore, do you satisfy (ii)?

it was drilled into my brain in English class that 'and' means you have to satisfy both conditions. however, since there is no match, then there is no ACP test, so does that part even apply?

......

you are correct, normally top heavy is 415 comp, but the safe harbor plans do get a free ride even if comp from date of participation is used.

[Mike Preston]

To require both is merely a reading by an individual who is English challenged. Consider the alternative. What would it mean if it were "or"? Well, the way English language logic was presented to me in college, "or" is EXCLUSIVE of "and"; while "and" is inclusive of "or". Stated another way, "or" means precisely one or the other, not both. While "and" means one or both. In order for "and" to mean both, the language must make it clear that both items are required to be present in order to establish satisfaction of the requirement.

The IRS is trying to claim that in this circumstance, "and" means "both".

IMO, that isn't correct.

Could the language of the law been made clearer? Sure. But lawyers will argue that one needn't require more than what is necessary to establish a "plain English meaning".

There are probably lots of examples one can dig up where the IRS has similarly interpreted "and" to mean "both" That wouldn't make it correct here, it would only make it incorrect there.

[Tom Poje]

which is why they 'promised' clarification would be forthcoming.

[Guest Lawrenceg]

In a similar vein,

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Background Info:

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Company has a safe harbor plan with age 21 and 1 year of service requirement. The entry dates are quarterly.

Company wants to have dual eligibility : no service for deferrals and 1 year of service for safe harbor match. Plan can be disaggregated and tested separately for 410(b) but will be subject to top heavy requirements.

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Specific Questions:

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The term ‘top-heavy plan’ shall not include a plan which consists solely of –

(i) a cash or deferred arrangement which meets the requirements of section 401(k)(12), [ADP safe harbor] ]AND

(ii) matching contributions with respect to which the requirements of section 401(m)(11) [ACP safe harbor] are met

Does making the safe harbor matching contributions not automatically satisfy the top heavy requirements?

ANSWER

No.

A participant who is eligible to defer, is required to receive an

employer contribution benefit total that is equal to the top heavy

minimum for the plan year, even though the employee has not met the

plan's eligibility requirements for the safe harbor match.

[Mike Preston]

I'm not sure it is similar. It might be, but it might not be.

In any event, the above is easily proven just by looking at the definition of a plan. In this situation, if you permissibly disaggregate, one of your plans is a safe harbor, the other is not. QED

[Tom Poje]

just to make sure

Rev Ruling 2004-13 makes it clear that one portion of the plan would be considered safe harbor (no ADP test) but the plan as a whole does not get a free ride in regards to top heavy.

Situation 4. The facts are the same as in Situation 1, except employees are permitted to make elective contributions immediately upon commencement of employment but are not eligible for matching contributions until they have completed 1 year of service with the employer.

In Situation 4, under the plan, newly hired nonhighly compensated employees who make elective contributions will not be eligible to receive any matching contributions until they have completed 1 year of service. Since this will result in a greater rate of matching contributions for highly compensated employees than for nonhighly compensated employees, the matching contributions do not satisfy the requirements of § 401(k)(12) (or § 401(m)(11)). Further, since all eligible nonhighly compensated employees under the plan do not receive safe harbor nonelective contributions or safe harbor matching contributions, the matching contributions made under the plan do not satisfy the requirements of § 401(k)(12). However, certain plans that provide for early participation may satisfy the requirements of § 401(k)(12) with respect to the portion of the plan that covers employees who have completed the minimum age and service requirements of § 410(a)(1), while satis fying the ADP test of § 401(k)(3)(A)(ii) for the eligible employees who have not completed the minimum age and service requirements. Unless a plan (within the meaning of § 414(l)) meets the requirements of § 416(g)(4)(H), no portion of the plan will satisfy § 416(g)(4)(H). (See Notice 2000-3, 2000-1 C.B. 413, Q&A-10.)