Frozen DB - Safe Harbor 401(k) - Top-heavy

[Lou S.]

A small company has an underfunded frozen DB and is thinking of add a 3% non-elective safe harbor 401(k) plan before 10/1.

They are funding the frozen DB until it can be terminated at 100% but no new accruals.

The aggregation group is T-H as is each plan on its own.

The safe harbor 401(k) plan is planning on making only the 3% non-elective employer contribution to NHCEs only. Does this qualify for the top-heavy exemption? The plan has 1 highly compensated non-key employee (the one who wants the 401(k) this year) who would not receive a contribution under the exeption but would get about a $4K T-H min if the exemption does not apply. 401(k) plan will fail testing miserably w/o safe harbor.

Not sure if this is better here or the 401(k) section.

Any help would be much appreciated.

[AndyH]

1. A frozen DB does not need a top heavy benefits (unless you have a bizarre document).

2. The DC minimum, if required, would be a maximum of 3%. The SHNEC could be used for that.

3. The top heavy benefit must be on 415 pay for the whole year; the SHNEC doesn't necessarily cover the whole year; pre-participation comp could be excluded for example.

Some of your comments are a bit unclear. Does this answer your questions?

[Lou S.]

Thanks. Sorry if my facts were unclear my mind is elsewhere today.

I realize the frozen DB does not need a T-H min, the question I have is does the SH 401(k) get an automatic pass on the top-heavy expemption even though there will be employer contributions to the frozen DB plan, though no other contributions (other than deferrals and SHNE) to the 401(k)?

That is can the company give just the 3% SHNE to the 4-NHCEs and nothing to the the non-key HCE and still be deemed to pass 416 or does the contribution to fund the DB shortfall blow the "no other employer contribution" requirement? Does the answer change if the contribution to the DB is more than the minimum required?

The employer doesn't mind giving 3% to the NHCEs so his HCE can make a 401(k) contribution but he doesn't want to give another $4K to the HCE who wants the tax deduction and who he feels is already very well compensated.

Does that make more sense?

[AndyH]

The DB is completely irrelevant if it is frozen. Contributions to it do not matter.

Any Non-Keys must get the top heavy minimum, HCE or not.

The SHNEC provides no "free pass"; the dollars contributed may merely be used towards the top heavy minimum requirements.

[Lou S.]

Thanks Andy, I really appreciate your responces here on the board but...

Section 416(g)(4)(H) provides that the term "top-heavy plan" does not include a plan that consists solely of (1) a CODA that meets the requirements of §401(k)(12) and (2) matching contributions that meet the requirements of §401(m)(11).

Revenue Ruling 2004-13, the IRS explains the exemption from the "top heavy" rules for a plan that consists solely of a safe harbor 401(k) arrangement.

Unfortunately RR 2004-13 addresses a single plan and doesn't talk about a frozen DB. I know that odd as it sounds if the 401(k) plan was the only plan and the frozen DB didn't exist it is clear that the non-key HCE can get zero becuase the plan is deemed not T-H under 416(g)(4)(H)

[JAY21]

A safe-harbor 401k plan is "deemed" to not be top-heavy under the 401k safe-harbor rules. The 3% non-elective safe-harbor may or may not cover top-heavy anyway (assuming pre-participation comp not excluded) but it's not needed if the plan isn't top-heavy due to other additional profit sharing contributions.

I don't see where the facts that you mention bump you out of this "deemed not top-heavy" status that safe-harbor 401k plans offer. I agree with Andy that the DB funding is irrelevant to the top-heavy issue.

I think you are exemption from top-heavy as long as the DB plan remains frozen and as long as you don't have other non-safe harbor profit sharing contributions.

[Lou S.]

Thanks. That was what I was hoping for. And yes I understand if any descretionary contribution goes to the 401(k) including forf. reallocation the T-H exepmtion is gone

Thanks again for the quick respoces guys, really appreciate it from both. Have a great weekend. I'm off to get get my client a buch of docs and notices...

[AndyH]

Thanks, Jay. I stand corrected. I'm accustomed to dealing with these things within the context of cross tested allocations and I misread the original post.