Top Heavy 401k - initial Plan Year

[Bruddah Kimo]

I have a new calendar year 401k Plan that started deferring contributions 11/1/2006. Employee deferrals are the only contributions made to the Plan. The plan fails 416 for the initial 2006 plan year. Compensation is defined as calendar year earnings. Plan has 7 active participants as of 12/31/2006 of which 4 are Key EE's. Does Plan need to make TH contribution to non-Key for 2006 as well as 2007 since it is the first plan year?

Aloha nui!

[Mike Preston]

Yes and no.

There may be a contribution amount, less than the full TH minimum, which, when added to the deferrals, result in the plan not being top-heavy. This is a circular calculation and you must be very precise to ensure compliance. The alternative is to make a 3% contribution to NHCE's per the plan's allocation procedures, which may result in a greater than 3% contribution for the HCE's/Keys. This ensures that top-heavy is satisfied and it ensures that the HCE's/Keys get the biggest bang for the buck. Of course, cash flow and deductions is an issue, but if all things align, it works out ok.

[Blinky the 3-eyed Fish]

Remember that the TH minimum is the lesser of 3% or the highest key EE %. So for 2007 if they limit the key employees' 401(k) deferrals they can try and lower their liability. If that is their objective that is.