Catchup due to failed ADP vs. top heavy - chicken or egg?

[AlbanyConsultant]

The only HCE (age >50) in a top heavy plan is deferring $4K on his $100K comp = 4% and is considering not being SH this year. The ADP for the NHCEs is 0.5%.

If I run ADP, this will clearly fail, and all of the excess will be recharacterized as catch-up. Fine. But does that affect the TH minimum? It seems a bit chicken-and-egg to me: if you look at TH first, then he deferred 4% so he has to give 3% to the employees. But if you look at the ADP test first, the net "non-catch-up deferral" is only 1% or so, so the TH minimum is less.

What I'm finding online and in the EOB is not 100% clear (to me) if "recharacterized as catch-up" is the same thing for this purpose as "catch-up". Is the TH minimum really only going to be 1%?

Thanks.

[Tom Poje]

from the following web site (which is the way I have understand it as well)

http://www.groom.com/resources-178.html

•Top-Heavy Plans: In determining current year contributions for key employees in a top-heavy plan, catch-up contributions are ignored. However, catch-up contributions made in prior years are taken into account in determining whether a plan is top-heavy (i.e., as part of the account balances). See Prop. Reg. § 1.414(v)-1(d)(2)(iv).

..........

in other words, in the current year, it is as if catch up contributions didn't exist, they weren't even made. or at least that is how I would describe it.

but for future years they are in the account balance to determine if a plan is top heavy (just not how much)

now, if your document says all participants receive top heavy, then the key employee receives, but that increases his contributions, and the vicious circle goes on until you hit 3%.