top heavy 401(k) Plan

[Chippy]

There seems to be a difference of opinion in our office as to how to allocate an integrated profit sharing contribution when the plan has a match and is top heavy. Can someone help to clarify?

Plan has a match, 25% up to 4% of compensation. The profit sharing contribution is integrated with social security. Plan is top heavy.

If the client wants to makes a 3% profit sharing contribution, how would that be allocated? Compensation is from date of entry.

[Jim Chad]

Did an Key employee defer more than 3%?

If yes, I would allocate the match, I would allocate the rest of the dollars per the document......which I would guess would be pro rata since it is such a small amount. In my documents, you would run out of dollars before getting to the permitted disparity part. Then the Employer would have to add enough dollars to bring everyone up to 3% of whole years comp. I mean everyone eligible for TH per the doc. FWIW

[Tom Poje]

first check doc to see if match is used for top heavy.

[Chippy]

Yes, the match is used towards top heavy

[Guest Sieve]

Chippy --

You said the 3% was a PS contribution. If so, then allocate as per the document's provisions for a discretionary PS contribution. That would require you to ignore the match, and also to allocate to key employees. You may or may not, however, be meeting TH allocation requirements with a PS contribution, because all those employed at year end must receive the TH contribution, while your PS allocation provisions may not provide for that, and the definition of compensation for TH may be different than the plan's definition of compensation for your PS allocation.

On the other hand, if the contribution is a TH contribution and is allocated as such, then apparently this plan would take the match into account when making the TH allocation.

So, it clearly depends on what kind of contribution it really is: PS or TH.

[Chippy]

So, if this is a profit sharing contribution, it is allocated per the document. And if 3% or less, then it would be comp to comp. , with participants entering mid-year getting a little more to bring them up to 3%.

If it is meant to be the top heavy minimum, then they would take the match into account and allocated enough to get everyone to 3%? The non-elective contribution would be less than 3%? Do I have that straight?

[Guest Sieve]

You basically have it right, but I wonder why you'd make a PS contribution if all you want to do is meet TH minimums.

If the employer first makes a PS contribution, then that is allocated per the plan document--and there are numerous ways that a document can provide for the allocation of a PS contribution which is integrated with social security. As a result, a 3% PS contribution may not provide the appropriate TH minimum. Then, after the PS allocation has occurred, you would make any necessary TH contribution.

If you want the PS contribution to meet TH allocation requirements, then you would have to make a sufficient PS contribtuion so that, when allocated as per the PS allocation provisions of the plan, the contribution would also have provided the TH minimum to all those required to receive it. Chances are, however, that a PS contribution, alone, which is used to meet TH minimums, will require a much larger contribution (especially if integrated with SS) than if TH minimums were allocated as per the TH allocation provisions of the plan.

If all you want to do is meet the plan's TH minimum requirements, then I would not mess with allocating a PS contribution first. Use the TH allocation provisions, which no doubt would simply allocate 3% to every participant there at year end (perhaps even to key employees, depending on the document) after taking the match into account (as your document apparently provides).

I'm not a TPA, so perhaps someone out there can provide you with a simpler explanation

[Jim Chad]

Chippy:

Sieve brings up some good points.

Is the 3% what the employer would like to put in as a total counting the match, the discretionary non-elective, and Top Heavy?

Or is the the 3% what the employer wants to put in after he has already put in the match?

[Chippy]

the client would like to make a 3% profit sharing contribution, in addition to the match.