Only owner deferred

[Cynchbeast]

We have a small 401(k) with only 3 participants. The owner is the only one who deferred in 2015 - $3,800. She is over 50, so since all her deferrals exceed the maximum allowed under ADP testing, it seems that technically all her $3,800 deferrals may be re-characterized as catch-up.

So - owner has $3,800 catch-up, 2 HCEs have no deferrals and receive no ER contribution of any sort. Does anyone see any problems with this???

[Doghouse]

Of course, you've still got top heavy to be concerned with.

[Lou S.]

Unless the plan is top-heavy, I see no problem at all.

But if the owner is the only one deferring I'm going to guess the plan is probably top-heavy though I could be wrong on that.

[Cynchbeast]

This is a wierd one. The plan is not top heavy for 2015 because the owner's 12/31/14 balance was $0 - she started deferring in 2015.

But for subsequent years, would that be an issue if there are no employer contributions? I thought TH min only applies if there are ER contributions.

[Dougsbpc]

I am not certain, but I think maybe the first year of a plan is considered the determination year for top heavy purposes. But believe catch-up contributions are not subject to top-heavy.

[Lou S.]

This is a wierd one. The plan is not top heavy for 2015 because the owner's 12/31/14 balance was $0 - she started deferring in 2015.

But for subsequent years, would that be an issue if there are no employer contributions? I thought TH min only applies if there are ER contributions.

Is this the first year of the plan? If so the determination date for 2015 and 2016 is 12/31/2015.

But assuming this is an on going plan and is NOT TH for 2015 you are fine as you are.

For 2016 assuming the owner now has more than 60% of the plan assets as of 12/31/2015 then the plan is TH for 2016 and deferrals count toward the "highest" allocation rate of any key employee. Any deferrals by the owner in 2016 will trigger some TH minimum.

[Lou S.]

I am not certain, but I think maybe the first year of a plan is considered the determination year for top heavy purposes. But believe catch-up contributions are not subject to top-heavy.

Sort of. "Pure" catch-up (not recharaterized catch-up) are NOT counted towards the "highest allocation rate" but catch-up contributions are considered part of the balance when figuring out the TH ratio.

So in the case let's say the owner had $200K in pay for 2015 and 3,800 in deferral for a deferral rate of 1.7%.

Let's also assume this is the first year of the plan and not using prior year testing.

Further assume these are the only assets of the plan.

HCE ADP = 1.7%, NHCE ADP = 0%; 2 times 0 = 0. So 100% of HCE balances need to be refunded to pass the test. BUT owner is catch-up eligible so no refund is made as 100% is recharaterized as cacth-up.

Now looking at TH Key balance = 3,800 / total balance 3,800 = 100% > 60% so plan is top heavy.

Since highest allocation rate of any key in my hypothetical example here is 1.7% then the TH minimum to non-Keys is 1.7% of pay.

[Pixie]

I have a take over plan.  Plan is Top Heavy.  The owner contributes $6,000 catch up only.  No other contributions except one dude put in $300.  :)  Since the majority of the catch up would be recharacterized to pass the ADP test, I assume this plan does not satisfy top heavy.  Do you agree?

 

[Tom Poje]

another of my long winded answers...

I have never seen it written you 'make catch-up contributions' - and you even indicated the majority of the catch-up would be recharacterized to pass ADP test,  which borders on a circular type argument. Though I guess some payroll companies classify deferrals as catch ups initially, and that really makes no sense. Anyway, just to make sure others understand the basics:

catch-up contributions occur when one reaches a limit

1. deferral limit (currently 18,000)

2. plan imposed limit (for example, a plan could limit everyone or just HCEs to a certain % or $ amount.

3. 415 limit

catch-ups could also result if a plan fails the ADP test, sort of an unplanned after effect

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

now, the original proposed regs indicated a plan could impose a 0% limit on key employees, and therefore all such people, if eligible, could only defer up to the catch up limit. this example, by the way was not in the final preamble, but that does not necessarily mean it is not valid. I have seen some argue if you have a cap of 0% then since the person can't defer they can't even make catch-ups. Personally I disagree, one could impose a 1 cent cap, and at that point, the amount is so small one still wouldn't generate a top heavy minimum unless the key person's comp is so low...

so, without knowing more details, in your situation, if there is only one NHCE deferring a small amount the plan would probably fail ADP test and all but a small portion of the key employee would be treated as a catch up. the remainder, whatever % of pay, is the top heavy minimum. which is what you conclusion was. very good and observant! gold stars.

The other option I have heard (if not in the document itself) a board of resolution indicating key employees are capped at 0%, and therefore the entire amount is indeed a catch up. of course this is supposed to have been in place beforehand..e.g. have it in place now for 2017 so you don't have a problem like this in the future..