top heavy to keys

[cdavis25]

I believe this is correct, but?? A Plan says the top heavy minimum goes to all participant employed on the last day. For the sake of simplicity, say there is one key employee that deferred 5% and the Plan is top heavy. The non-keys employed on the last day are all getting a 3% non-elective. The one key does not have to get anything, since they deferred over 5% correct. i.e. Their deferrals are allowed to count towards their 3% top heavy min. I believe the "deferrals are not counted in the top heavy min" rule only applies to non-keys.

[Kevin C]

There is no requirement to provide a top-heavy minimum benefit for key employees, unless your plan document says that key employees also receive the TH min. If your document says that, the terms of the plan will determine what the keys get.

[BG5150]

If in fact the Key EE in question is supposed to get a TH minimum, the 5% deferral doesn't count toward it. He or she must get a 3% ER contribution.

For the future, you may want to amend the plan to give the TH to only the non-Key EEs.

[cdavis25]

BG5150 are you sure about that? There is no requirement for the key to get a top heavy minimum by law. It would only be required by the Plan. I agree with Kevin that the Plan would define that. They use a Corbel document. The Plan does say the top heavy goes to all; however, it also states...

Notwithstanding the foregoing, for any Top-Heavy Plan Year, the sum of the Employer contributions allocated to the Account of each Employee shall be equal to at least three percent (3%) of such Employee's 415 Compensation (reduced by contributions and forfeitures, if any, allocated to each Employee in any defined contribution plan included with this Plan in a required aggregation group). However, if (1) the sum of the Employer contributions allocated to the Participant's Account of each Key Employee for such Top-Heavy Plan Year is less than three percent (3%) of each Key Employee's 415 Compensation and (2) this Plan is not required to be included in an aggregation group to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, then the sum of the Employer contributions allocated to the Participant's Account of each Employee shall be equal to the largest percentage allocated to the Account of any Key Employee. However, in determining whether a Non-Key Employee has received the minimum required allocation, such Non-Key Employee's Elective Deferrals shall not be taken into account. The minimum allocation required (to the extent required to be nonforfeitable under Code Section 416(b)) may not be forfeited under Code Section 411(a)(3)(B) or 411(a)(3)(D).

For purposes of the minimum required allocation set forth above, the percentage allocated to the Account of any Key Employee who is a Participant shall be equal to the ratio of the sum of the Employer contributions (excluding any Catch-Up Contributions) allocated on behalf of such Key Employee for the Plan Year divided by the 415 Compensation for such Key Employee for the Plan Year.

Elective deferrals are technically Employer contribution. I would think they would count towards that minimum for the keys.

[austin3515]

1.416-1 Questions and answers on top-heavy plans.

M-20 Q. May elective contributions be treated as employer contributions for purposes of satisfying the minimum contribution or benefit requirement of section 416©(2)?

A. Elective contributions on behalf of key employees are taken into account in determining the minimum required contribution under section 416©(2). However, elective contributions on behalf of employees other than key employees may not be treated as employer contributions for purposes of the minimum contribution or benefit requirement of section 416. See section 401(k)(4)© and the regulations thereunder. This Question and Answer is effective for plan years beginning after December 31, 1988.

I am dumbfounded right now... Found this reference in the EOB. Practically it is of little consequence, but this is quite interesting indeed.

[BG5150]

BG5150 are you sure about that? There is no requirement for the key to get a top heavy minimum by law. It would only be required by the Plan. I agree with Kevin that the Plan would define that. They use a Corbel document. The Plan does say the top heavy goes to all; however, it also states...

Please see my first sentence: "If in fact..."

[BG5150]

However, it seems that I erred in saying that deferrals didn't count toward TH for Keys. I simply never knew that.

I guess the grand majority of the case I deal with either exclude keys from TH, or the companies make a PS or SH to all that's greater than 3%.

[austin3515]

Same here Bart. I got really excited for a minute about non-shareholder physicians and then realized, nope, they're not keys. So really it changes nothing for me, but I suppose it makes me a better TPA for having known it.

[Kevin C]

I'm not convinced that 1.416-1 M 20 is saying that salary deferrals count towards the top heavy minimum for a Key Employee if Keys also receive the TH minimum. In the regs, only non-keys get the TH minimum, so I read M 20 as applying only to what the eligible non-keys are required to receive. The Keys' contributions, including deferrals, are used to determine what the TH minimum is for those non-key employees.

You might want to check with Corbel. Your interpretation would meant that by extending the TH min to Keys, it would only extend the contribution to Keys who deferred less than 3%. That may not be what they intended.

If the only PS contribution is the TH minimum, they may be able to get the Keys 3% of comp by just increasing the amount of the PS contribution. The results would depend on what the PS formula is, but they should be able to at least get close. Or, are they wanting to only contribute what is required?

[austin3515]

Their answer is in the context of this question:

M-20 Q. May elective contributions be treated as employer contributions for purposes of satisfying the minimum contribution or benefit requirement of section 416©(2)?

The first part of their answer is "yes, for keys...". Combine that with the wording in the Corbel Document which is perfectly lined up with that interpretation and you have me convinced it is so, however ridiculous.

[cdavis25]

Tks Austin. I found that reference this morning too and came back here to post. I will let you know what Corbel says. I reached out yesterday. I was in the same boat as you and BG. It never came up before for me and really only applies if they want to avoid giving anything to keys that defer over the TH min. I guess you could have an issue under those circumstances though. Image giving the TH min only. You think that is 3% to all (since the document says to all) employed on the last day. The PS allocation requirement is 1,000 hours and last day. If a key did not work 1,000 hours and deferred 3%, then they are not due anything for top heavy according to the Plan. So, you can't just say I gave a 3% PS contribution. If the key received 3%, then it would be incorrect.

[Belgarath]

I'm with Kevin on this. I don't interpret any of this as saying that IF your document requires that keys receive a TH minimum, that elective deferrals by keys count toward the required employer contribution for those keys.

[austin3515]

So you interpret Corbel's document language above to require a 3% ps to a key who deferred 3%? I don't see anywhere that Corbel has excluded the deferrals for purposes of the minimum allocation. Recall that at the beginning of the paragraph, the THM goes to ALL employees:

"the sum of the Employer contributions allocated to the Account of each Employee".

As such, if there is some adjustment to keys calculation it must be stated. Note that it is very clearly stated with respect to the non-keys.

[Belgarath]

P.S. - is your Corbel document you are looking at a volume submitter or a prototype?

[BG5150]

Did you ask Corbel what their thoughts are? You're paying Derrin & his cohorts a lot of dough. Take advantage of it.

[Belgarath]

I'll be interested to see what Corbel says. FWIW, I took a look at one of their prototypes, and the language is not the same as what you have, so I'm assuming you have a VS. I'll be interested to see if their answer to you differentiates the treatment for a VS and a prototype.

[austin3515]

I looked at my PT from Corbel as well and in our prototype the key definitely gets the 3% THM from Er Contributions. I suppose it's a question of whether or not that approach is mandatory, and it seems to me anyway that is not (of course it's mandatory to do what the document says).

I agree it, must be a VS document, or maybe it's the PPD version of the prototype (as opposed to the Corbel version).

What a great discussion.

[Belgarath]

Yes, it's certainly made me rethink some of my previous assumptions. Of course, none of our plans provide TH to Keys anyway, but it's useful to consider this if I run into it in an outside document anyway.

[cdavis25]

It is the VS. I am still waiting to hear back, but will let you know.

[Lou S.]

BG5150 are you sure about that? There is no requirement for the key to get a top heavy minimum by law. It would only be required by the Plan. I agree with Kevin that the Plan would define that. They use a Corbel document. The Plan does say the top heavy goes to all; however, it also states...

Notwithstanding the foregoing, for any Top-Heavy Plan Year, the sum of the Employer contributions allocated to the Account of each Employee shall be equal to at least three percent (3%) of such Employee's 415 Compensation (reduced by contributions and forfeitures, if any, allocated to each Employee in any defined contribution plan included with this Plan in a required aggregation group). However, if (1) the sum of the Employer contributions allocated to the Participant's Account of each Key Employee for such Top-Heavy Plan Year is less than three percent (3%) of each Key Employee's 415 Compensation and (2) this Plan is not required to be included in an aggregation group to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, then the sum of the Employer contributions allocated to the Participant's Account of each Employee shall be equal to the largest percentage allocated to the Account of any Key Employee. However, in determining whether a Non-Key Employee has received the minimum required allocation, such Non-Key Employee's Elective Deferrals shall not be taken into account. The minimum allocation required (to the extent required to be nonforfeitable under Code Section 416(b)) may not be forfeited under Code Section 411(a)(3)(B) or 411(a)(3)(D).

For purposes of the minimum required allocation set forth above, the percentage allocated to the Account of any Key Employee who is a Participant shall be equal to the ratio of the sum of the Employer contributions (excluding any Catch-Up Contributions) allocated on behalf of such Key Employee for the Plan Year divided by the 415 Compensation for such Key Employee for the Plan Year.

Elective deferrals are technically Employer contribution. I would think they would count towards that minimum for the keys.

No, elective deferrals of keys are ALWAYS used to determine the highest allocation rate of any key employee but elective deferral are NEVER used to satisfy the top-heavy minimum contribution requirements.

Therefore if the Plan document states that ALL employees (including key employees) receive the top-heavy minimum then you must make the 3% employer contribution to the key or you are not following the terms of the plan document.

[austin3515]

Did you read all of the posts above Lou S.? We all would have said the same thing before the post started. I don't think it as simple as you suggest.

[MoShawn]

FWIW, I always interpreted this portion:

For purposes of the minimum required allocation set forth above, the percentage allocated to the Account of any Key Employee who is a Participant shall be equal to the ratio of the sum of the Employer contributions (excluding any Catch-Up Contributions) allocated on behalf of such Key Employee for the Plan Year divided by the 415 Compensation for such Key Employee for the Plan Year.

To refer specifically to this statement:

However, if (1) the sum of the Employer contributions allocated to the Participant's Account of each Key Employee for such Top-Heavy Plan Year is less than three percent (3%) of each Key Employee's 415 Compensation

The entire first paragraph is describing how to arrive at the "minimum required allocation set forth above". This sentence clarifies that when doing part (1) you must include the deferrals of Key employees in determining whether or not a Key has exceeded 3% of compensation.

[cdavis25]

Corbel came back and said I am not reading the document correctly. The language is saying that a key employee's deferrals can trigger the need to provide non-keys with a minimum 3% (or, if less, one-third the highest HCEs rate of allocation, including the key's deferrals).

The plan language reflecting your adoption agreement selection to provide the minimum top-heavy contribution to both keys and non-keys is not affected. So, for example, if a key employee receives less than required top heavy minimum (which for a key employeee would otherwise always be $0), they would be entitled to the additional nonelective contribution, which would be in addition to their own deferrals, if any.

Although, we are using the VS and not the adoption agreement. I did tell them that. I am still wondering if you could count the deferrals, if the document was written that way, for the key employees. I sent a Q/A to ASPPA for the next conference. Maybe I will be selected.

Lou can you site where you see that "elective deferral are NEVER used to satisfy the top-heavy minimum contribution requirements". We all agree that is true for non-keys and it was cited above.

[austin3515]

I'm surprised because I honestly felt it was a good interpretation of their document which was also supported by the regs shown above. But are you suggesting that perhaps you were not clear about referencing the VS as opposed to the PT?

[cdavis25]

I think this trumped it in the document language further down the page...my bad in reading too fast.

For any Top-Heavy Plan Year, the minimum required allocation set forth above shall be allocated to the Nonelective Contribution Account of all Employees who are Participants and who are employed by the Employer on the last day of the Plan Year regardless of the Employee's level of Compensation, including Employees who have (1) failed to complete a Year of Service; and (2) declined to make mandatory contributions (if required) or, in the case of a cash or deferred arrangement, Elective Deferrals to the Plan.

I am still curious if you are allowed to count the deferrals for keys assuming the document language allowed it; although, I will admit it has minimal impact.

[austin3515]

I went back and look at the original language provided and it does not reference Nonelective Account - it just the "Account" - which of course makes sense because match counts towards the THM. Are you referencing PT language? IT's the VS that we think this applies to ("we" because I don't think I am the only one).

[Bird]

fwiw...all the talk about the regs was a distraction. It all boiled down to the document, and in particular, the definition of "Employer" contribution, and while deferrals are technically employer contributions, they're not for this purpose.

[cdavis25]

Austin, this was from the VS document. That other paragraph I posted is a couple paragraphs later in the document...i.e. it came after the language I originally posted. That clarified the top heavy to the keys for me in the doucment. I did send a q/a to ASPPA for the next conference in the IRS q/a. It appears to me that a document could be written to give top heavy to keys and use deferrals to count towards that minimum for them.