Top Heavy / "Early" Participation in 401(k) Feature

[Guest EMC]

A Profit Sharing Plan with a 401(k) salary deferral feature permits employees to defer salary immediately upon enrollment, but requires 12 months of employment to receive the discretionary employer profit sharing contribution. If the Plan is top-heavy, must the Plan provide the minimum top-heavy contribution for the employees who are eligible to defer salary, but not yet eligible to receive the discretionary employer profit sharing contribution?

Is there a way to disaggregate the portions of the Plan for purposes of determining which employees are to receive the top heavy minimim contribution?

[Guest]

according to the ERISA Outline Book,

an employee 'is considered a participant in a 401(k) plan if he has satisfied the requirements to be eligible to make elective deferrals regardless of whether he actually elects to defer...This is true even if the employee is not a participant for any other portions of the plan. Accordingly, such an employee IS entitled to the top heavy minimum allocation.

I am not sure if you can 'disaggregate' the statutory people from top heavy.

Top heavy contributions raise an interesting issue, if there is an additional profit sharing contribution that has been made. you now have a plan that must be cross tested...you have some people receiving x% of pay and others receiving 3%

[rcline46]

Generally no, you cannot exclude from Top Heavy. However, if you specifically write them out in the document, submit to the IRS with full disclosure, you will get a LOD and can then keep them out.

[IRC401]

The plan document cannot override the top heavy rules. If the employees are entitled to top heavy benefits under the law, they are entitled to them and can sue for them regardless of the plan document. Sneaking a plan document past the IRS in the determination letter process will protect the plan sponsor against retroactive disqualification by the IRS but not against participant lawsuits.

If you have a top-heavy 401(k) plan, you should give very serious consideration to having a safe harbor plan.