Any way to avoid top heavy minimum?

[Lynn Campbell]

client wants to set up a Profit Sharing or Money Purchase Plan for business owner only, no other employees work or will ever work 1000 hours, therefore, would never join Plan. Is there any way to permit these "non-eligible" Employees to make 401(k) deferrals without running into the top heavy requirement? These Employees would never be vested in the top heavy contribution...and it seems there should be a way to avoid it?

[Guest]

It sounds like you are saying:

1. there is already an existing plan with deferrals

and

2. company wants to put in a plan for owner only.

If so, NO way can you avoid top heavy minimums. plans will have to be aggregated, and anyone who is in, regardless of hours, will get top heavy minimums. (Otherwise ALL companies would adopt an 'extra' plan for the owner only)

also, you would have possible nondiscrim issues involved if only the owner gets a profit sharing contribution- though if no one else ever had 1000 hours, even though they were deferring, you could statutory exclude and probably get around this.

[Lynn Campbell]

To clarify, there are no plans in existence now. Client would like to set up PS for 1999, only eligible EE is the key EE, using a 1 yr service/age 21 requirement. Then next year, he wants to set up separate 401(k) for all the employees who work less than 1000 hours and he will NOT participate in the 401(k) Plan. The top heavy regs seem to say that these 2 Plans do NOT have to be aggregated and therefore no top heavy contrib is needed in the 401(k)?

[Guest Paul McDonald]

Why bother with a 401(k) plan for the employees working less than 1000 hours? Who among that group would be able to afford to defer more than $2,000 per year? Have the employer set up a payroll deduction IRA program to help those that want something.

[Lynn Campbell]

Assume that these are well paid employees (including dental hygienists) who have already funded IRAs on their own. My question is - is the top heavy minimum needed or not? Thanks for all input...

[Dowist]

It could work under the right facts.

You could set up a separate plan just for the non-owners - don't let the owner participate. And then the owner's plan would cover just him or her, no nonowners.

If the 2 plans can exist independently under the coverage rules, you wouldn't have to aggregate them for top heavy purposes - the non-owner plan would not be top heavy because there would be no key employees. The owner plan would be top heavy but there would be no nonkeys to get top heavy contributions.

This all depends on being able to have two independent plans, each of which meets the coverage rules on its own - which sounds possible under your facts because you're saying that all of the nonowners would not meet the minimum age and service requirements.

But if you have nonowners who do meet the minimum age and service, it wouldn't work because you'd have to include one or more of them in the owner's plan (or somehow take into account the nonowner's plan in testing the owner's plan). Plans that are aggregated for coverage have to be aggregated for top heavy.

Tricky - and something you'd have to monitor closely (dangerous)!

[Guest]

given the conditions cited, it does sound possible.

as long as the profit sharing plan simply has 1 year wait/age 21 and not 'only Mr owner is eligible'

even if one of the other employees satisfies the 1 year wait, then he/she will be the only NHCE in that plan, and you would still pass coverage. and as long as you pass coverage, you need only give top-heavy in that plan.