QACA Safe Harbor Match and Plan is Top Heavy

[steverenner]

I met with a prospect yesterday who is using an unnamed payroll provider for administration of their plan. The prospect started their plan on 1/1/2015. It is a QACA Safe Harbor Match(100 on 1% and 50% up to 6%) with automatic enrollment at 3% and auto escalation of 1% up to the level of 6%. Two Owners, 10 Employees. Prospect was told by unnamed payroll company that they must stop their deferrals because the plan is top heavy. My understanding is that the QACA SH Match works like the Basic Safe Harbor Match and Non-Elective in that the plan is deemed to pass top heavy unless the client makes additional discretionary contributions. I am still completely confused as to why the payroll company notified the client that they had to stop deferrals(10,000 each). I just want to make sure I am not missing something here. Thoughts on how to advise the prospect on how to communicate with the payroll company? We will be taking over administration in 2016, I am pretty certain of that.

[Tom Poje]

well Code Section 416(g)(4)(H) says "The term 'top-heavy plan' shall NOT include a plan which consists solely of

(i) a cash or deferred arrangement which meets the requirements of section 401(k) or 401(k)(13), and

(ii) matching contribution with respect to the requirements of 401(m)(11) or 401(m)(12)

I looked up 401(k)(13)

and it indicates

401(k)(13)(B) Qualified Automatic Contribution Arrangement

[if I take the first letters of that I get QACA, but maybe I did something wrong]

I looked up 401(m)(12) and it says

401(m)(12) (A) Qualified Automatic Contribution Arrangement

which I also end up with QACA

Unless you have immediate eligibility for deferral and a wait for the match then based on the Code, the plan is NOT top heavy.

I have since corrected my copy of the Code using red crayon to indicate that the Code is incorrect according to an unnamed payroll provider.

Dang it, was I suppose to use green magic marker instead?

[GMK]

It always pays to check, Steve.

Tom, red is the correct color, but not a crayon. When unnamed providers pull stuff out of a hat, you should use a MAGIC marker.

[steverenner]

Thanks for both of your replies. i really appreciate you confirming this for me. I reviewed code earlier to confirm. Sometimes when you hear things so outlandish, you start to second guess yourself!

[Tom Poje]

maybe outlandish, but on the other hand, at least the payroll provide (though wrong in their understanding) was trying to help the client the best way they knew how.

[BG5150]

Why would you have to stop deferrals in any even if the plan was top heavy? To lower the TH minimum?

In the case of stopping at 10,000, even at max comp, you're over the 3% allocation that drives the full minimum contribution.

Thoughts on how the client "communicates" with the payroll provider? "You're fired."

[Tom Poje]

BG5150

in this case it is a new plan, so top heavy would be determined at the end of the year for the current year. if the keys were cut off now the plan might end up at 58% instead of 62%

again, in this particular case, if the plan only has safe harbor contributions it is a moot point since that would be top heavy free anyway.

................

one of the very first plans I ever ran in my life (on the old Pentabs system, back in the late 80s)

it was a first year of the plan. the system ran through things, determined the plan was top heavy and allocated an additional contribution. then determined because of that the plan wasn't top heavy so it took it away. but then it determined the plan really was top heavy so it allocated it all over again. but then determined it wasn't top heavy....talk about getting stuck in a loop. it just ran and ran and ran...

[BG5150]

Did enough people opt out of the auto-enroll to have such a small non-key balance? has the match been allocated and deposited thus far, too?

And how would the payroll company know what the balances are, and consequently that it's top heavy? Is the p/r company doing administration, too? Is there even such a feedback between the two systems?