Two 401(k) Plans, same employer

[imchipbrown]

A long time client with a Profit-Sharing Plan inquired (late 2015) about setting up a 401(k) Plan because of employee interest.  I suggested he do a survey to see what employees might defer.  He never got back to me.  In the meantime, Plan needed PPA restating so I turned on the 401(k) switch.

Early 2018, client wants to "discuss the next ten years" with me.  During the meeting, he nonchalantly says that he started a 401(K) Plan in 2016 with his Payroll Company.  Only he deferred, ADP test failed and he was told he'd get a refund.  (Same in 2017, except one other HCE deferred and was due a refund as well.)

Client had a MP/PS combo forever.  MP (Plan 001) merged into PS (Plan 002) in early 2000's.  We filed the 5500 for 2016 on time (assets ~$500k).  Payroll Company prepared a 5500 for 2016 showing only the owner deferral and match of $498.39 + interest as assets.  Client tried to submit Payroll Company prepared 5500 a number of times and it was rejected.

I asked if he had signed any paperwork, he put me in touch with Payroll Company (dude that set up the new Plan was long gone) and they sent me an Adoption Agreement.  I found a number of inconsistancies with the AA, including "New Plan 001"  instead of restated Plan 002, immediate eligibility instead of 1 year and a 5% of deferral match where it was discretionary in the PPA restement.  I also requested and received the account valuations for 2016 and 2017.

Dilemma #1- Payroll Company took $498.39 out of owners pay in 2016 and shows the amount in their accounting as $474.69 deferral and $23.70 match.  The match amount equals 5% of deferral, by magic.  Owner wrote no checks; funds were taken from Company account.

Taken by itself, the New 001 Plan is Top-Heavy (Super Top-Heavy w/002).  Don't even know what Owners Net C was in 2016 (since no contribution, no census) but assume it's over $200K.  So $23.70 / $200K is 0.01185% of pay Top-Heavy contribution for all employees.  But wait!  Owner's 5% match is forfeited under ACP. 

Question - Is everyone due a Top-Heavy contribution even if the Owner's match, after forfeiture, is 0% of pay?  (As an aside - Why wouldn't the 2016 deferral have been refunded?)