Safe Harbor Top-Heavy Exempt

[John Feldt ERPA CPC QPA]

A small 401(k) plan is written to provide a safe harbor match. If the employer provides no profit sharing and no forfeitures are allocated (or they are allocated as ACP-free match), the plan is top-heavy exempt.

Suppose the plan is also written to partially exclude one sales person who is a Non-Highly Compensated Employee (not an owner and makes under $115,000). They are only excluded from the deferral and match portion of the plan.

The plan easily passes coverage by covering the other 8 NHCEs. The employer wants the sales person to still get profit sharing in the years that they actually make a profit sharing contribution.

However, in the years where no profit sharing is contributed, is the plan still top-heavy exempt (assume no forfeitures)?

[Tom Poje]

I've never seen the issue raised, I certainly don't think the intent of the 'top-heavy' free rule is meant to apply to plans in which someone is eligible for part of the plan but not be able to defer (e.g. not sure how this is different than losing the top-heavy free rule if otherwise excludable folks can't get the safe harbor. A comment in the ERISA Outline Book in regards to that says "It is the definition of a plan for IRC section 414(l) purposes, not the definition of a 'plan' for coverage...which applies to the top heavy rules. (chapter 11 Section XIV Part H 2.d.1)d)) Note the comment indicates it isn't the coverage rules that apply, so whether the plan passes coverage is a moot point.

I figured in the case of a safe harbor match, the govt figured someone could always defer at least 3%, therefore get the match which would cover the normal top heavy anyway, but if otherwise excludables couldn't even do that then the top heavy rules apply.