Top Heavy minimum in 401(k) plan triggered by SEP IRA contribution?

[AndrewZ]

I think this is pretty obvious since you have to aggregate 401(k) plans and SEP IRAs for top heavy purposes, but I'd like confirmation -- if an employer has a 401(k) plan with all employees eligible (no service requirement), and a SEP IRA with no non-owner employees eligible (under the 3 of 5 prior years option), and makes a contribution to the SEP IRA, wouldn't that trigger a top heavy minimum contribution in the 401(k) plan?

This is assuming the SEP IRA agreement allows it to co-exist with a qualified plan.

Thanks.

[Lou S.]

Yes. Assuming there is at least 1 key employee covered by both plans receiving an allocation in the SEP.

[AndrewZ]

Thanks, Lou, and Happy Holidays.

[austin3515]

You just blew my mind with something... LEt's say the 401k plan excludes owners? No top-heavy minimum?

[Bird]

You just blew my mind with something... LEt's say the 401k plan excludes owners? No top-heavy minimum?

I believe that is correct. Less of a big deal than it might first seem...they owner could have a SEP with 3 year eligibility and no 401(k) at all. I've set up 401k-only plans for employees-only with immediate entry, with PS plans that covered the owners.

[AndrewZ]

This is an unusual case where a company with part-time employees had a 401k plan with no minimum service requirement for eligibility, then "forgot" about it and set up a SEP IRA (the employees didn't meet the 3 years with service requirement) and contributed to that instead for themselves. Since the owners are eligible for both plans, and the 401(k) plan had non-Key employees eligible, they are entitled to Top Heavy minimums in the 401(k) for years in which they are still active at year-end, triggered by the SEP IRA contributions.

We're working on identifying the corrections needed - so far it's a non-amender/non-filer, with unfunded top-heavy minimum contributions.

If it turns out that they were using a 5305-SEP agreement (which doesn't allow for concurrent qualified plans), I believe we have to reverse the ineligible SEP contributions, which should remove the Top Heavy contribution requirements.