Real World, Real Problem, Real Ugly

[imchipbrown]

Sight unseen, I agreed to take over administration of a 401(k) Plan. Prior "Administrator" provided zilch. Reconstructing records, I see a Top-Heavy Plan in 1998, no minimum contribution, and Key Employee deferrals and match of 2.7% (was in effect 3 months of 1998).

Testing for 1999, I'm calculating ADP for NHCs based on 3 months deferrals/3 months pay. Is this Kosher? 401k feature added to long-existing PS.

I want to self-correct Top-Heavy contribution for 1998. Comments?

Company asked if Match in 1998 could be used for Top-Heavy. I know, legally it can. But practically?

Match was 50% of first 6%, which isn't in the document. It's deferral ratio. Self correct?

If I use the Match for Top-Heavy and pass 401(a)4 (doubtful), then I have no LOW ACP % for 1999. I've thought of using HCs Match for TOP-Heavy, but this won't pass 401(a)4.

I know, a doozie.

[Guest]

using match as top heavy can't be done in a standardized or prototype, so that may be a moot point anyway.

Lets assume all match is used to satisfy top heavy, and for those who didn't defer 6%, they are given an additional contribution to kick them up to the 3%. at this point all have received 3%, except maybe terminees. I would expect the plan to pass (a)(4) on an allocation basis. it can't fail unless you have over 30% terminees.

you will now have to use current year testing but that may be the best solution.

(On the other hand, I have seen documents that say 'only non keys will receive top heavy minimums, and this would kill any idea of using the match)

[imchipbrown]

Thanks, Tom. I've never done this before, but I'm getting to a clearing in the fog of the regulations.

Very fortunately, looks to be a Volume Submitter Doc and Keys DO get TH contrib.

What I'd never considered was that you could make an additional contribution and allocate it solely to those whose match didn't get them up to 3%. Being too math-oriented, I saw it as two separate allocation formulas, the second (fill in the holes) being discriminatory.

Stepping back, I guess not. I guess I'm not THAT old a dog to learn a new trick.

Anyone, answers to whether this is self-correctible?

[Guest]

see Q & A 61 under the Q & A for Plan Defects. It sounds like APRSC might work.

The 'established practice' in place to catch top heavy....well, who knows what the prior administrator had in place. Obviously you have such a practice because you caught it.

it sounds like you got lucky with the document, especially since no one received more tham 3% match, and that keys are not excluded from top heavy. I am no expert when it coems to using match to satisfy top-heavy, but everything I've read seems to indicate you can get by in this case...

that is, 1.the law says all must 3%.

2. match can be used to satisfy 3%, (but then not used in acp test.

3. no acp test exists since all match used to satisfy top heavy

4. remaining people giving contribution to satisfy top heavy, plan passes (a)(4) test since all ees receive 3% [tested on allocation basis]

This might not be good for morale, because some ees might think, I deferred to get this match contribution, others didn't do anything and still got 3%. why the heck did I defer. yes, in a way, that is unfair, but that is what worked in this case. you certainly wouldn't want that as an established practice, would you?