Match and Top Heavy Minimum

[austin3515]

Got a non-key HCE who is having all of his match refunded to him due to the 2009 ACP test (no NHCE's deferred).

1) Does he still need to get the top-heavy minimum?

2) Does the answer change if the non-key HCE is 0% vested, and therefore forfeits all of the match?

[J Simmons]

Got a non-key HCE who is having all of his match refunded to him due to the 2009 ACP test (no NHCE's deferred).

1) Does he still need to get the top-heavy minimum?

2) Does the answer change if the non-key HCE is 0% vested, and therefore forfeits all of the match?

I do not think that the fact that the failure of the ACP test, the non-key HCE being 0% vested, or the testing failure force out to him relieves the plan of making the top-heavy minimum for him if he was yet employed at the end of the year or the plan does not require that for top-heavy minimum contribution purposes.

[austin3515]

But the point is that his match satisfies the top-heavy minimum. Question is, does having it refunded and/or forfeited change that treatment?

[J Simmons]

But the point is that his match satisfies the top-heavy minimum. Question is, does having it refunded and/or forfeited change that treatment?

I do not see how a contribution taken away from the non-key can satisfy the top-heavy minimum. After the refund, where does that leave the non-key? Without contributions from the ER for the plan year that are equal to the top-heavy minimum.

I do not see how forfeiture relieves the ER from making the top-heavy minimum contribution either. It is not the ER that gets the windfall from the forfeited benefits, but the other participants that would get it on the re-allocation.

[austin3515]

I agree with you on the forfeiture scenario, but not on the refund since in the latter the participant did receive a benefit under the Plan.

but alas, what I'm hoping is that this is conclusively answered somewhere in the regs??

[J Simmons]

Hey, Austin,

Treas Reg § 1.416-1, M-19 addresses matching contributions used to satisfy the top-heavy minimum, and it does not specify an answer to your questions. Also, I see nothing under Treas Regs § 1.401(m)-0 thru -5 about it. So I don't think you will have a definitive answer here.

Keep in mind, the ACP test is protecting NHCEs, but the top-heavy minimum rules are protecting non-key employees. So while a re-allocation of part of an HCE's excesses might yet have the excess counting for some testing purposes, taking the top-heavy minimum away from a non-key employee leaves the top-heavy minimum yet unsatisfied. That's how I see it.

[austin3515]

So you are convinced that if a non-key HCE gets the match refunded to him, that he is still entitled to the THM on top of the match he has already gotten from the Plan? Isn't that a bit of a windfall?

[Tom Poje]

I would of thought that no, the person is not entitled to anything more - he received 3% and whether it gets distributed or not I would have thought is a moot point.

but your question raising an interesting point. suppose all the NHCEs defer and receive match sufficient for top heavy.

a non key HCE doesn't defer, so is owed the top heavy.

if you provide it as a nonelective, then you have 1 HCE with a nonelective contribution and no NHCEs. how the heck do you pass coverage?

[austin3515]

Tom -

I agree that is another intereting question. Can't even pass average benefits, can I?

But what do you think about the guy who forfeits his match - the very same match that satisfied THM. Would you agree that his THM is not satisfied and he needs the 3%?

Sounds like a couple more questions for the IRS Q&A youi mentioned last week!

[J Simmons]

So you are convinced that if a non-key HCE gets the match refunded to him, that he is still entitled to the THM on top of the match he has already gotten from the Plan? Isn't that a bit of a windfall?

The ACP excess is paid out to him in his capacity as and by reason of him being an HCE.

He is entitled to the top-heavy minimum by virtue of his being a non-key.

The ER can avoid the 'windfall' to the HCE by not making any match until the plan year has ended and the ACP test is run (which might require an amendment to the plan).

[Tom Poje]

so is it a matter of which comes first, the chicken or the egg?

Suppose the match is made Jan 31. on that date date, has the individual satified the the top heavy minimum?

at a given moment in time I'd say yes.

now 3 months later I fail ADP test, and he forfeits the match. I'm still not convinced you now have to pony up nonelective money so he re-gets a top heavy. As noted above, in unusual circumstances this could actually force a plan to fail coverage.

Suppose the plan also failed the ADP test, and you distribute the deferrals. You now have to forfeit the related match. But the IRS has clearly indicated you could run the ACP test first and distributed $ for a failed test, then run the ADP test.

so why can't you run the top heavy first, then run the ADP/ACP first.

I'm not saying thats the answer, but just a possibility. my guess is that it is probably too late to submit a question (except at the Conference directly). usually they meet with the IRS in early - mid Sept, so they can get answers and assemble everything ahead of time.

[BG5150]

I would say that the TH Min would be satisfied even with a refund.

At the end of the year, the Employer still gets a deduction on the match amount, right? The ER made a contribution to the participant's account that satisfied the TH requirement.

What should it matter if there was a subsequent distribution of that money?

[austin3515]

I'm with you on the distribution one...

What do you think about the forfeiture scenario?

[PensionPro]

The regs say that if a plan uses contributions allocated to employees other than key employees on the basis of employee contributions or elective contributions to satisfy the minimum contribution requirement, these contributions are not treated as matching contributions for purposes of applying the requirements of sections 401(k) and 401(m) for plan years beginning after December 31, 1988. Thus these contributions must meet the nondiscrimination requirements of section 401(a)(4) without regard to section 401(m). See §1.401(m)-1(f)(12) (iii).

[austin3515]

Accoridng to the EOB, that was a pre-2002 rule.

4.d.1) Restrictions on use of matching contributions in pre-2002 plan years. For plan years beginning prior to January 1, 2002, any matching contributions used to satisfy the top heavy minimum contribution must be separately tested for nondiscrimination purposes under §401(a)(4), and are not subject to the §401(m) nondiscrimination test (i.e., the ACP test) normally applied to matching contributions. Matching contributions that are not used to satisfy top heavy continue to be subject to the ACP test. This rule is prescribed by Treas. Reg. §1.416-1, M-19. Note that having to test the matching contributions used for top heavy purposes under §401(a)(4) usually does not present a problem because non-key employees are typically nonhighly compensated employees for nondiscrimination testing purposes. However, it is possible to have non-key employees who are highly compensated employees, so that any matching contributions used to satisfy top heavy minimums for these type of non-key employees could raise a §401(a)(4) testing issue. As for the remaining matching contributions that are not used to satisfy top heavy minimums, they will probably have a tougher time passing the §401(m) nondiscrimination test, because all (or most) of the key employees' matching contributions are still included in that test but less of the non-key employees' matching contributions are included. Thankfully, this whole problem goes away in post-2001 plan years with the changes made by EGTRRA.