Safe Harbor Match and Top Heavy

[thepensionmaven]

This seems to be a very basic question but I am now having

"third-thoughts".

Employer asks us to review a Top Heavy safe harbor match 01(k) that another TPA firm currently handles.

No employer contributions beside the safe harbor match.

OK, but there are a few employees that have met the age and service requirements and have opted not to defer. OK, no match for these participants.

Since the plan is top heavy and these people are eligible and were

employed on the determination date, must these individuals receive the top heavy minimum 3%?

We say yes, the current TPA says no and this is the way they

"handle" all their 401(k) plans and has the audacity to back-

up the claim by telling me she has "many years as a TPA"; and has

requested the citation from us.

So, I'd like to know where to locate a cite.

[TPAMan]

A 401(k) plan with Safe Harbor only contributions is generally exempt from the Top Heavy provisions. You can google for the cite.

[WCC]

Based on the information provided in the post, the current TPA is correct, the plan is deemed not top heavy because of the safe harbor contribution.

CHAPTER 11 401(k) AND 401(m) TESTING Part H of the EOB is quite long but a portion is as follows.

Safe harbor 401(k) plans generally are subject to the top heavy rules like any other plan. However, for plan years beginning on or after January 1, 2002, a 401(k)(12) safe harbor plan is deemed to be a non-top-heavy plan if the conditions of IRC §416(g)(4)(H) are satisfied

2. Certain safe harbor 401(k) plans are deemed not to be top heavy. A safe harbor plan is deemed not to be a top heavy plan (even if the top heavy ratio, if calculated, would exceed 60%) if:

(1) the plan consists solely of a safe harbor 401(k) arrangement, either under the 401(k)(12) safe harbor or, in post-2007 plan years, the QACA safe harbor, and,

(2) to the extent there are matching contributions made to the plan, all of the matching contributions satisfy the ACP safe harbor prescribed by IRC §401(m)(11) or, in the case of a QACA safe harbor plan, the ACP safe harbor prescribed by IRC §401(m)(12) (which cross-references the requirements of IRC §401(m)(11)(B)).

See IRC §416(g)(4)(H), as added by EGTRRA §613.

[Lou S.]

The only ways they would need an additional TH contribution is if there were non-safe harbor employer contributions or allocations of forfeitures, or if you had some split eligibility where the right to make 401(k) contributions was sooner than the right to receive safe harbor contributions - such as immediate eligibility to make 401(k) but year of service to receive match.

Otherwise as TPA correctly points out a plan that has only deferrals and safe harbor contributions is exempt for the TH requirements or is deemed to be not TH.

[Tom Poje]

I realize this is not your situation, but it is a good example for a reminder -a plan with a safe harbor match is a good example of a plan in which it is advisable to have employees enrollment forms on file indicating '0' deferral as an election - to prevent some disgruntled employee from running the DOL with "I didn't even know the plan existed". I vaguely recall a scenario in which the owner set up such a plan and didn't tell anyone - socked away max deferrals and got a match and no contributions to employees!

[thepensionmaven]

Even if there are employees that are contributing $0 but in the plan regardless.

Suppose an employer has a safe harbor match wherein he is the only participant deferring outof 15 participants who are deferring $0 and is the only participant receiving a match.

Unless I'm missing something, how is this exempt?

[thepensionmaven]

Just checked with the client, the plan has some rollover contributions.

Checking EOB on that.

Thanks for all the help.

[Lou S.]

Even if there are employees that are contributing $0 but in the plan regardless.

Suppose an employer has a safe harbor match wherein he is the only participant deferring outof 15 participants who are deferring $0 and is the only participant receiving a match.

Unless I'm missing something, how is this exempt?

As Tom is alluding to you are not exempt unless you follow all the rules which include telling folks about the plan, giving them the effective right to defer and handing out the required annual safe harbor notices timely each year. If you do comply with all the rules and the owner is still the only one contributing in might look a little fishy but from a legal stand point it is all good and still deemed not top heavy.

[thepensionmaven]

Thanks.

[austin3515]

Suppose an employer has a safe harbor match wherein he is the only participant deferring outof 15 participants who are deferring $0 and is the only participant receiving a match.

Having employees participate is not one of the requirements to maintain the exemption. In your example, there is still no top-heavy minimum due (Assuming no other contributions to the plan other than 401k/SH, AND assuming no split eligibility.

As Tom was alluding to, the IRS might be very suspicious of you, so it makes sense to get signed declination forms from everyone (or at least most of them).