Top-Heavy Plan

[ac]

We are working on a 401(k) plan. The plan is not safe-harbor and is top heavy. The two partners do not want to make nor can afford an employer contribution to the Plan. The plan will pass ADP testing, so the two partners may defer the maximum under the 401(k) provisions. However, if they defer it will trigger a top-heavy minimum contribution.

Does anyone have a similar situation or know of anyway to allow the partners the ability to defer under the 401(k)?

Another twist is that two partners retired in 2010 and 2011. They no longer have ownership interest in the employer. They left their money in the Plan. They occasionally comeback and work for short stints. When they come back and work, will they be considered key employees?

Thanks for any advice or help!

[MoShawn]

For your first question, any contribution for a Key employee will trigger the TH minimum, even a deferral.

For your second question, if they are no longer owners and are not officers they will remain Former Key employees.

[BG5150]

For your first question, any contribution for a Key employee will trigger the TH minimum, even a deferral. For your second question, if they are no longer owners and are not officers they will remain Former Key employees.

Reminder: And their balances are removed from the numerator AND denominator for top heavy calcs.

[Tom Poje]

the original preamble to the catch-up regs had an example of a cap of 0% deferral on HCEs. therefore if they deferred it could only be up to the catch up limit.

This example was not in the final preamble, but that could have been simply for space reason.

some argue if you have a cap of 0% then they can't defer, and therefore can't defer, and so the example was removed for that reason.

so let's suppose you put a cap of 1 cent. now they can defer. oooooh. now they have to put in a top heavy based on the fact they received 1 cent. so if their comp is 100,000 then any NHCE making 50,000 must receive 1/2 cent to receive the same rate and satisfy top heavy. (keys excluded from top heavy of course)

so if the owners are over age 50 then yes, you can probably have them defer a minimal amount (if you consider $5500 minimal) without a lot of top heavy damage.

[Kevin C]

Also remember that Former Key only applies for determining the TH ratio. When you determine the TH minimum contributions, they are treated as non-key.

[Guest richard-k]

Following up to Tom's post about catch-up contributions.

Let's assume that a plan sponsor is allowed to have a 401k (deferral only) plan that has a zero deferral limit for key employees. Assume that the plan does not allow for a discretionary match or a discretionary profit sharing contribuiton for anyone. So, key employees are eligible to participate in the plan, but the only action they can take is to defer up to $5,500 if they are age 50 or older. .

The plan sponsor also maintains a regular profit sharing plan, which the same key employees participate in.

Both plans cover all employees of the plan sponsor.

Are these two plans in a Required Aggregation Group? In other words, are the key employees "participating" in both plans?

(Note that under IRC 414(v)(3)(B), "such plan shall not be treated as failing to meet the requirements of section 401(a)(4), ... 410(b) or 416 by reason of the marking of (or the right to make) such contribuiton.") In the first plan design described above, the only "participation" that the key employee has is the right to make a catch-up contribution.