Does giving someone a 3% top-heavy minimum help you pass 410(b) coverage issues?

[Guest Enda80]

Does giving someone a 3% top-heavy minimum help you pass 410(b) coverage issues?

[Mike Preston]

Yes, although you hardly have a choice in the matter.

[Belgarath]

Be careful on this, however, depending upon what type of plan document you are using. If you have a design-based safe harbor, then you need to be able to pass 410(b) by treating the employee as not benefiting if his allocation is solely due to top heavy. 1.401(a)(4)-2(b)(4)(vi)(D)(3).

[buckaroo]

Not so fast. You are correct about the issue, but not about the reference. My recollection is that the rule about passing the testing excluding the employees who only receive the top heavy minimum is not a coverage rule. The coverage testing is to be done including them as benefitting. It is actually used to determine wheteher the top heavy formula causes the plan to be a safe harbor plan under 401(a)4. If it fails a 70% ratio, then the rate group testing under 401(a)4 would need to be employed.

[Belgarath]

My emphasis

( 3 ) Top-heavy formulas. In the case of a plan that provides the greater of the allocations under two or more formulas, one of which is a top-heavy formula, the top-heavy formula does not fail to be available on the same terms to all employees merely because it is available solely to all non-key employees on the same terms as all the other formulas under the plan. Furthermore, the top-heavy formula does not fail to be available on the same terms as the other formulas under the plan merely because it is conditioned on the plan's being top-heavy within the meaning of section 416(g). Finally, the top-heavy formula does not fail to be available on the same terms as the other formulas under the plan merely because it is available to all employees described in §1.416–1, Q&A M–10 (i.e., all non-key employees who have not separated from service as of the last day of the plan year). The preceding sentence does not apply, however, unless the plan would satisfy section 410(b) if all employees who are benefiting under the plan solely as a result of receiving allocations under the top-heavy formula were treated as not currently benefiting under the plan. For purposes of this paragraph (b)(4)(vi)(D)( 3 ), a top-heavy formula is a formula that provides the minimum benefit described in section 416©(2) (taking into account, if applicable, the modification in section 416(h)(2)(A)(ii)(II)).

My edit didn't go through, so I'll try again! I agree that 410(b) testing, in and of itself, is unaffected by the above. My point was simply - be careful. If you have a design-based safe harbor, and you just rely on a 410(b) pass without considering the above, you can muck up your safe harbor.

[imchipbrown]

Thought I'd double-check my understanding before I mislead my client.

The Plan is a 401(k) with

a 3% Safe-Harbor Non-Elective (hard-wired and notified).

Additional Match up to 6% of Compensation with no last day/hours is discretionary.

Integrated Profit-Sharing is discretionary with last day/hours requirement and 410(b) "add back" clause.

Owner and one terminated employee with 1000+hours. Top-Heavy. Both make deferrals.

1) Plan will make 3% Safe Harbor Non-Discretionary.

2) Maybe additional match up to 6% to both

3) Maybe integrated Profit-Sharing to owner only.

I think (1) satisfies Top-Heavy and Safe Harbor

I think (2) is OK as far as staying Safe Harbor

I think (3) is OK, because (1) and/or (2) makes 410(b) pass.

Flaws?

[Tom Poje]

if there are no other contributions besides deferrals and safe harbor then the plan is not top heavy.

if the employee terminated before the end of the year, he is not eligible for top heavy anyway (unless you have a strange document)

if its a 'discretionary' match and was limited to 6% deferred and 4% comp maximum (e.g. 66% match up to 6% deferred), that match would be considered safe harbor and no testing required nor would that kick the plan out of being top-heavy free.

since you indicated the match was a 'maybe' I see no way this would be a safe harbor if its up to 6% of comp (rather than 6% deferred)

If there is an additional profit sharing with a last day rule and the indiviudal quit he would not receive the profit sharing, but would have to be bumped up to any gateway minimum since he received the 3% safe harbor.

[BG5150]

And to add to Tom's post:

A SH contribution can be given on compensation only while eligible for the plan, whereas a Top Heavy contribution must be made on full-year comp. You you can have instances where the SH would not be enough to satisfy the TH allocation.

[Lou S.]

3) Maybe integrated Profit-Sharing to owner only.

I think (3) is OK, because (1) and/or (2) makes 410(b) pass.

Flaws?

Is this a cross tested plan passing on a benfits basis? If so you are OK assuming you pass all relevaent tests under the general test.

If you are relying on a proto-type with the "traditional 70% 410(b)" coverage then no because the sole NHCE is going to get 3% and sole HCE is going to get (3 + X)% if you make a PS contrib so for purposes of 410(b) I don't think your NHCE is considered benefiting in t his case.