basic top heavy

[pmacduff]

I'm not thinking clearly this morning with regard to top heavy. I have a plan with no eligibility for 401(k) contributions (all enter 1st of the month following hire). Plan is safe harbor. Plan is top heavy. Employer wants to make a profit share contribution for 2010. I know as soon as there is a profit share allocation the safe harbor top heavy "free ride" goes away.

Profit share eligibility AND allocation is 1 year of service, 1000 hours, last day rule.

This Doctor has 5 employees, 4 of whom are eligible for profit share without question. The 5th employee is a participant under the 401(k) portion due to the immediate eligibility, but not contributing.

She has worked approx 315 hours per year since her hire date. She is not termed.

I believe that she is required to receive a top heavy minimum contribution because even though she has not met the eligibility/allocation requirements for the profit share portion she is a plan participant as of 12/31 (due to the 401(k) eligibility) and therefore must receive a top heavy.

That being said - this is a comp to comp basic profit share formula. If the other participants receive, say 15% of compensation, must she also receive 15% of compensation or can 3% only be allocated to her?

Am I all wet and she can be excluded entirely from any profit share allocation?

any help appreciated

[Tom Poje]

if the snow is melting and the window is open and the wind is blowing in the right direction, you could very well be all wet.

you are correct, the person is not eligible for the profit sharing but must receive the top heavy. that should be it, but...

now you have a situation of a plan in which some people received different percenatges. sounds discriminatory, which could require gateway minimums!

in this case 4 of 5 NHCE get the full amount - which means 80% benefit so you would pass using the allocation testing method and no gateway required.

I suppose the plan would also pass the gateway using the Broadly Available gateway as well.

lastly, the plan could test nondiscrim with otherwise excludables tested separately and the gateway wouldn't be need for her either.

such a long-winded answer from a big wind himself.

[pmacduff]

thanks Tom. I was going to double check the nondiscrim testing - just wasn't sure if I could leave her at the 3% only or if I would have to give her the same %tage as everyone else - since the plan formula is a basic comp to comp profit share.

Whew - done so many cross tested formulas in the recent past, these old fashioned ones can really throw me!!

Thanks again!

[BG5150]

I'm guessing the safe harbor is a match.

[austin3515]

(EDIT to add heading: Excruciating Minutiae Question)

Why does otherwise excludibles even come into play? She was not eligible for the profit sharing component of the plan? So for example, if I had this plan on Relius, RElius would not include her in the test, even if I chose not to disaggregate.

[Tom Poje]

a 'mere' important question, would Relius even attempt to provide a top-heavy for the person or do you have to override. I don't remember.

but once they receive a top-heavy, they have received a non elective contribution. and once they receive it, do you choose to not test it any test?

[pmacduff]

Yes - safe harbor is basic match. Relius did give her the 3% top heavy allocation only when I ran the allocation.

The nondiscrim testing includes her on Relius unless I mark the "otherwise excludables" box.

Everything passes handily, even with her included in the testing - except, of course, the gateway test because she's only at 3%.

I just thought of something relative to the current political environment...top heavy regs REQUIRE this client to make a contribution for this person, which is deductible by the client, which in theory will reduce the amount of tax that the client owes. Wouldn't it behoove the government to do away with top heavy and thereby all of those contribution & deductions that are reducing the taxable income of companies? HA HA.

[rcline46]

Why are you doing Gateway? This only applies if you are cross testing, and you should pass easily on an allocations basis, even you check top heavy only not benefitting. As Tom said this is 80% so you would not have to test on an accrual (cross-tested) basis.

And yes the lady must get Top Heavy.

[BG5150]

Wouldn't it behoove the government to do away with top heavy and thereby all of those contribution & deductions that are reducing the taxable income of companies? HA HA.

For the IRS, yes. For the DoL, which is ostensibly on the participants' side, no.

(But don't cry for the IRS. They'll get their money sooner or later...)