Top Heavy Contribution because of Match

[imchipbrown]

A HCE makes a deferral and is matched. 

Because of a complete ADP and ACP failure (HCE only deferrer for first year of 401(k)), the deferral and match are refunded.  Match was only ER contribution during the year. 

Plan is Top-Heavy.  Do all Non-keys get a contribution (% of match/HCE comp) even though the contribution for the HCE, after refund, is $0?

[Tom Poje]

back so long ago I don't remember (2002 ASPPA Conference Q and A #3 the following was asked and answered, indirectly in line with your question:

p 3. Are corrective distributions (ADP/ACP) considered in-service distributions and added back for 5 years for purposes of determining

top-heavy status?

Yes.

I vaguely recall a similar response years later at another Conference that might have been more direct to the point.

Arguably it is somewhat implied in the 415 Regs because those corrected amounts are treated as an annual addition

 

so, yes, it appears technically that is what is suppose to happen. top heavy needed, or at least that was what I was taught

[Tom Poje]

found it

at the 2004 asppa conference #29

29. Assume a deferral only 401(k) plan is top heavy and fails ADP

testing. Suppose the only HCE (compensation of $200k) originally

defers $10,000 (i.e., 5% of pay) but is required to be refunded $5,000

to pass ADP (i.e., “adjusted” deferral/benefit rate = 2.5%). Is the top

heavy minimum contribution equal to 2.5% or 3.0%?

A: 3%

 

(of course any comments at the ASPPA conference might not reflect an actual Treasury position)

[Lou S.]

Top heavy doesn't care about the refund as far as I recall. You look at allocation rate of key employee before any refunds.

[PensionPro]

1 hour ago, imchipbrown said:

Do all Non-keys get a contribution (% of match/HCE comp) even though the contribution for the HCE, after refund, is $0?

Elective deferrals are included in the calculation of key employee allocation rate.

 

[BG5150]

1 hour ago, imchipbrown said:

A HCE makes a deferral and is matched. 

Because of a complete ADP and ACP failure (HCE only deferrer for first year of 401(k)), the deferral and match are refunded.  Match was only ER contribution during the year. 

Plan is Top-Heavy.  Do all Non-keys get a contribution (% of match/HCE comp) even though the contribution for the HCE, after refund, is $0?

Is this HCE a Key Employee?

[ETA Consulting LLC]

I know this doesn't exactly speak to the technical issues, but I've become disheartened over the years seeing these plans installed and blown up in the first couple of years.  I know many of the skilled consultants anticipate these types of issues during the plan design phase and implement plans that avoid these issues. Unfortunately, many do not.

Just venting a little frustration. 

[imchipbrown]

ETA Consulting,

This was "sold" to my (soon to be former) client by the experts at Paychex.  They have "Comcast-like" support reps and no "their person" to talk with.

Cripes

[Luke Bailey]

I had what seems like a very similar case 20+ years ago. I think the argument is probably still open under Code and regs, as it was then, that the returned amounts are not "contributions" for Section 416, because they didn't "stick" and, if timely distributed, are even considered taxable in year of contribution, but because the 415 regs treat returned excess contributions as "annual additions," I doubt the IRS would accept the argument.

In the case I had, I represented employer very similar to yours. We offered the insurance company that had incorrectly advised the employer to let it try to get a PLR or other ruling from IRS saying the excess contributions were not contributions for the key employee under 416, but the insurance company just through in the towel and paid the amount for the non-keys. Not sure whether they even tried sounding out IRS informally and were discouraged, or just drew own conclusion.

It does seem unfair.

[imchipbrown]

Thanks Luke,

Looks like I missed and important piece, that being

"Elective deferrals by non-key employees cannot be treated as contributions for purposes of the minimum contribution requirement in a top-heavy defined contribution plan. But elective deferrals are taken into account in determining the contribution percentage of a key employee. See Treas. Reg. 1.416-1, M-20. "

So, his deferral goes into the calculation.  Thankfully both the deferral and match were token.

[Luke Bailey]

Right, I was just coming back to point that out, imchipbrown.

[imchipbrown]

What a great community.  Thanks to all.  BG5150, didn't mean to leave you hanging; yes, sole proprietor so 100% owner.  So are two of his adult kids.

[Kac1214]

Can you make the Top Heavy as a QNEC? Also advise client that they are TH in year 2 as well. 

 

[Tom Poje]

in other words, it's possible that a3% top heavy as a QNEC might help pass adp testing and take the plan out of being top heavy

[imchipbrown]

The good news is that the client loves his employees, had a great year and will contribute >3% to all for 2017 and most likely 2018. Will go with Safe-Harbor 3% Non-Discretionary for 2019.  This, of course, is an unusual situation.