Top Heavy 401(k)

[pmacduff]

I remember in the distant past (I think!) that if a 401(k) plan is top heavy and the 401(k) ADP fails; you still need to consider the original % that the HCE contributed in order to figure your required top heavy contribution, is this correct?

[Guest dmartin@swerdlin.net]

Yes, you are right... when calculating the percentage of pay the keys received as contributions to the plan for the plan year, you must count the full salary deferral received for each key, even if some of the deferral has since been refunded due to ADP test failure.

[pmacduff]

thank you. I have an unusual situation for 2008 where the owner has to take ALL of the his 401(k) contributions back (no NCHE contributions at all, prior year testing). We are going to refund what he has contributed to-date in 2008 now and he has stopped 401k contributions. The owner thinks that because his contribution percentage is effectively going to be 0% for 2008 he shouldn't need to make the top heavy.

By the time we get to 12/31/2008 and compute his annual percentage for '08 it will be less than 3% anyway, so the top heavy for his NCHE shouldn't be much at all.

Thanks again.

[BG5150]

thank you. I have an unusual situation for 2008 where the owner has to take ALL of the his 401(k) contributions back (no NCHE contributions at all, prior year testing). We are going to refund what he has contributed to-date in 2008 now and he has stopped 401k contributions. The owner thinks that because his contribution percentage is effectively going to be 0% for 2008 he shouldn't need to make the top heavy.

By the time we get to 12/31/2008 and compute his annual percentage for '08 it will be less than 3% anyway, so the top heavy for his NCHE shouldn't be much at all.

Thanks again.

Was 2007 the first plan year? If so, many plans are written that you can use an assumed 3% prior-year rate for teh initial year? Or did you already use that in '06?

[pmacduff]

Yes - 2006 was the first plan year and we used the assumed 3% for that year. Oddly enough, it wouldn't have mattered for '06 because there were no NHCE employees until 2007.

thanks for the replies...

[Mike Preston]

You might want to consider having the employer make a 3% QNEC for 2007. He could then leave 5% of his deferrals in the plan for 2007 and the QNEC would satisfy the top-heavy. This may not be allowable under your doc, though, and it is too late to add any language to beef up how you might treat 2007. Even if it *is* allowable, you certainly wouldn't be able to use that 3% as part of the consideration of prior year percentage when determining 2008. That is, you can't count the QNEC as support for 2007 ADP *and* 2008 ADP.

[Kimberly S]

You might want to consider having the employer make a 3% QNEC for 2007. He could then leave 5% of his deferrals in the plan for 2007 and the QNEC would satisfy the top-heavy. This may not be allowable under your doc, though, and it is too late to add any language to beef up how you might treat 2007. Even if it *is* allowable, you certainly wouldn't be able to use that 3% as part of the consideration of prior year percentage when determining 2008. That is, you can't count the QNEC as support for 2007 ADP *and* 2008 ADP.

And while you're amending you could change to current year testing for 2008.

[pmacduff]

Mike - the client passed 2007 ADP testing. 2008 is the issue - but if I understand what you are saying since he has to make the top heavy anyway for '08 he may as well do it as a QNEC and that way avoid or reduce refunding of '08 401(k)?

Kim - this is a multiple employer plan written with prior year testing from the get-go (except for the safe harbor employers). I don't think the Sponsor wants to change that.

I ususally stay on top of all of the non-safe harbor Employers about their top heavy status so that they know when the end of the year arrives they will be required to make a contribution as applicable. In this instance the Sponsor (leasing Co.) had not properly identified the owner for this particular Employer. (I review all of the Employers on an ongoing basis to be sure that all of the key employees in my records are accurate and up-to-date.)

The plan has actually been audited (IRS) twice since we took over the admin and has come through with flying colors both times (WHEW!).