Top Heavy and Safe Harbor allocation

[perplexedbypensions]

Hi all,

I am working on a plan that is Top Heavy and is only allocating a 3% nonelective Safe Harbor for the Plan Year. No other employer contributions or forfeitures.

The plan excludes compensation while not a participant, so I have allocated a Safe Harbor contribution to a participant based on her partial year compensation.  I did so because I thought that Top Heavy minimums were waived if the only contribution was the Safe Harbor.

I am being questioned on why I did not allocate Safe Harbor based on the participants full year gross compensation.

I cannot find documentation showing which way is correct ( I am hoping mine is). 

Could anyone point me in the direction of a regulation that says a plan is exempt from the TH minimums as it is not considered TH in a year when the only contribution is a SH?

And if this is correct, do you agree that the SH can be allocated on partial year compensation?

Thank you all so much!

[C. B. Zeller]

Unfortunately I do not think you can do it your way.

416(g)(4)(H) says that a plan which consists of solely a cash or deferred arrangement and matching contributions that satisfy the safe harbors of 401(k)(12)/(13) and 401(m)(11)/(12) gets a pass on being top heavy. Once you have any nonelective contributions in your plan this provision no longer applies and you are subject to the normal top heavy rules.

[401king]

9 minutes ago, C. B. Zeller said:

Unfortunately I do not think you can do it your way.

416(g)(4)(H) says that a plan which consists of solely a cash or deferred arrangement and matching contributions that satisfy the safe harbors of 401(k)(12)/(13) and 401(m)(11)/(12) gets a pass on being top heavy. Once you have any nonelective contributions in your plan this provision no longer applies and you are subject to the normal top heavy rules.

But these are Safe Harbor non-elective contributions...

[Mr Bagwell]

If the plan consists of only deferrals and safe harbor contributions, the plan is exempt from a top heavy contribution.

Yes, you can allocate the safe harbor on part comp if the plan is written as part comp.

[perplexedbypensions]

Maybe I should not have called the Safe Harbor a nonelective Safe Harbor.  They only have allocated a Safe Harbor contribution and no other nonelective contributions.

 

[Mr Bagwell]

Ur fine on what you called it.

The top heavy exemption is still in play whether it's safe harbor match or safe harbor nonelective.

[BG5150]

16 minutes ago, C. B. Zeller said:

Unfortunately I do not think you can do it your way.

416(g)(4)(H) says that a plan which consists of solely a cash or deferred arrangement and matching contributions that satisfy the safe harbors of 401(k)(12)/(13) and 401(m)(11)/(12) gets a pass on being top heavy. Once you have any nonelective contributions in your plan this provision no longer applies and you are subject to the normal top heavy rules.

401(k)12 is "regular' SH, whether Match or Nonelective.  (k) 13 is the QACA SH.

This is from the EOB:

If a plan consists solely of a safe harbor 401(k) arrangement, as described in IRC §401(k)(12) or IRC §401(k)(13)[34] , and, if there are matching contributions made to the plan, all of the matching contributions satisfy the ACP safe harbor prescribed by IRC §401(m)(11), the plan is not a top heavy plan, even if the top heavy ratio of the plan would exceed 60%. See IRC §416(g)(4)(H), as added by EGTRRA §613. This rule is effect for plan years beginning after December 31, 2001. Thus, for pre-2002 plan years, safe harbor 401(k) plans were subject to the top heavy rules in the same manner as other qualified plans.

[Tom Poje]

ASPPA 2005 Q and A #13

 

13. Revenue Ruling 2004-13 indicates the term “top-heavy plan” does not include a plan

which consists solely of:

1. a cash or deferred arrangement that meets the requirements of section 401(k)(12)

2. matching contributions with respect to which the requirements of section 401(m)(11)

are met.

We have a safe harbor 401(k) plan provides for a 3% safe harbor nonelective

contribution. No match is provided. Does this plan satisfy the condition required or must

a match also be provided?

A. Yes, it satisfies the provisions and no match is required.

In this case there are a number of participants who enter the plan mid year, so the 3%

safe harbor would not be based on total compensation.

5

A. That’s ok.

Would the answer change if the Plan provides the 3% safe harbor contribution only to

NHCE's.? This Plan has several HCE's who are not Key Employees

A. Yes

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

all bets are off if, for instance , you have immediate eligibility to defer and a waiting period to be eligible for safe harbor.

[justanotheradmin]

The pre-approved plan document we use has language in the basic plan document that mirrors the regs and revenue procedures for the Top Heavy exemption. So if you are not comfortable pointing back to the IRS, and would prefer to point to your document, look there. Maybe it has similar language. 

[C. B. Zeller]

2 hours ago, BG5150 said:

401(k)12 is "regular' SH, whether Match or Nonelective.  (k) 13 is the QACA SH.

Right, my point was that 416 only provides that a plan which consists solely of a CODA that satisfies the 401(k) safe harbor and a match that satisfies the 401(m) safe harbor is considered not top heavy. If you satisfy 401(k)(12) by way of the nonelective contribution then your plan does not consist solely of a CODA and match, and therefore the deemed exemption from top heavy does not apply.

[C. B. Zeller]

2 hours ago, Tom Poje said:

In this case there are a number of participants who enter the plan mid year, so the 3%

safe harbor would not be based on total compensation.

5

A. That’s ok.

I am honestly surprised to hear this as it does not seem to agree with a straightforward reading of the statute. 

[Mike Preston]

15 minutes ago, C. B. Zeller said:

Right, my point was that 416 only provides that a plan which consists solely of a CODA that satisfies the 401(k) safe harbor and a match that satisfies the 401(m) safe harbor is considered not top heavy. If you satisfy 401(k)(12) by way of the nonelective contribution then your plan does not consist solely of a CODA and match, and therefore the deemed exemption from top heavy does not apply.

Please re-read the entire thread, because the above is not correct.

[C. B. Zeller]

I seem to be in the overwhelming minority on this so I'll concede that I am wrong. Apologies for any incorrect info I may have given.

That said, it would certainly make me feel better if anyone has a direct cite that says so. The EOB references Rev. Rul. 2004-13 but I don't see how that answers the question, its examples only deal with a safe harbor match. Does a safe harbor non-elective plan consist solely of a cash or deferred arrangement? No, of course not, it is a CODA plus a 3% nonelective contribution. Therefore I fail to see how such a plan meets the definition of "a plan which consists solely of a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13)" as stated in the statute. The nonelective contribution is required by 401(k)(12)(C) but it is not itself part of the CODA.

Again, I realize my reasoning must be faulty. If anyone could point out what I'm missing I would appreciate it.

[Mr Bagwell]

I'll let someone else provide the cite...  but there are 3 contribution alternatives to being a safe harbor plan.

1.  3% nonelective contribution

2.  Basic Matching: 100% of 3, 50% of next 2%

3.  Enhanced Match:  at least as favorable as the basic match at every rate of deferrals, but match rate may not increase and no HCE may receive a higher rate of match

So when you create a safe harbor plan, you go and select the option in the adoption agreement to which design alternative the employer would like.   For example, the 3% nonelective. 

(I'm discussing very simple plan design here.  NOT dual eligibility.  No Profit Sharing. No other match)  So if you have safe harbor plan with solely deferrals and one of the 3 contribution alternatives.  You get the top heavy exemption.  It's a beautiful plan design for many employers.  And should be simple to manage.

I'm not sure where you went off the rails, but we want you back on the tracks.

[Kevin C]

I'll agree the code section could have been written more clearly, but this issue has been settled for a long time.  Our VS 401(k) base document describes it this way:

Quote

If the Plan is a Safe Harbor 401(k) Plan and the Plan consists solely of Safe Harbor/QACA Safe Harbor Contributions (as described in Section 6.04(a)(1)) and Matching Contributions that satisfy the ACP Test Safe Harbor (as described in Section 6.04(i)), the Plan is not subject to the Top Heavy requirements of this Section 4.

 

[BG5150]

1 hour ago, C. B. Zeller said:

Right, my point was that 416 only provides that a plan which consists solely of a CODA that satisfies the 401(k) safe harbor and a match that satisfies the 401(m) safe harbor is considered not top heavy. If you satisfy 401(k)(12) by way of the nonelective contribution then your plan does not consist solely of a CODA and match, and therefore the deemed exemption from top heavy does not apply.

That is incorrect.

(sorry, I was late to that party)

[Tom Poje]

Cites are Rev Ruling 2004-13 as it is applied in context with 401(k)(12) 

Situation 1 of Rev Ruling 2004-13 says no nonelectives made only those that satisfy 401(k)(12) or 401(m)(11)

 

Rev. Rul. 2004-13

Top-heavy status; special rules. This ruling describes four situations where a non-governmental profit-sharing plan contains a cash or deferred arrangement described in section 401(k) of the Code that provides for safe harbor matching contributions. In the first situation, the ruling holds that the requirements of section 416(g)(4)(H) are met for that year. In the other situations, the ruling holds that the contributions do not meet the requirements of section 416(g)(4)(H).

ISSUE

In the situations described below, which plans meet the requirements of § 416(g)(4)(H) of the Internal Revenue Code for the 2004 plan year so that they are not subject to the top-heavy rules in § 416?

FACTS

Situation 1. A nongovernmental profit-sharing plan containing a cash or deferred arrangement (“CODA”) described in § 401(k) provides for safe harbor matching contributions that are intended to satisfy the requirements of § 401(k)(12)(B) and otherwise satisfies the requirements of § 401(k)(12). The plan also permits the employer to make a nonelective contribution for any plan year at the employer’s discretion. The nonelective contribution is subject to 5-year vesting described in § 411(a)(2)(A) and is allocated to participants’ accounts in the same ratio that each participant’s compensation bears to the compensation of all participants. The plan is a calendar-year plan and covers all employees of the employer (including highly compensated employees as defined in § 414(q)) who have 1 year of service and are age 21 or older. Other than elective contributions and the matching contributions, no other co ntributions are made to the plan for 2004 and there are no forfeitures.

Situation 2. The facts are the same as in Situation 1, except the employer makes a discretionary nonelective contribution to the plan for 2004.

Situation 3. The facts are the same as in Situation 1, except forfeitures occur in 2004 due to the severance from employment of a participant who was not fully vested in amounts attributable to discretionary nonelective contributions made in a prior year. Pursuant to the terms of the plan, forfeitures are allocated to participants’ accounts for 2004 in the same manner as nonelective contributions.

Situation 4. The facts are the same as in Situation 1, except employees are permitted to make elective contributions immediately upon commencement of employment but are not eligible for matching contributions until they have completed 1 year of service with the employer.

LAW AND ANALYSIS

Under § 416, a plan that is a top-heavy plan (as defined in § 416(g)) for a plan year must satisfy the vesting requirements of § 416(b) and the minimum benefit requirements of § 416(c) for such plan year. Section 416 does not apply to any governmental plan.

Section 416(g)(4)(H) provides that the term “top-heavy plan” does not include a plan that consists solely of (1) a CODA that meets the requirements of § 401(k)(12) and (2) matching contributions that meet the requirements of § 401(m)(11). Section 416(g)(4)(H), which is effective for years beginning after December 31, 2001, was added to the Code by the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16.

The determination of whether a plan is a top-heavy plan is made on a year-by-year basis. Thus, a plan that satisfies § 416(g)(4)(H) for one plan year may be subject to the top-heavy requirements the next plan year if it does not satisfy § 416(g)(4)(H) for the next plan year.

Section 401(k)(12) and § 401(m)(11) provide design-based safe harbor methods for satisfying the actual deferral percentage (“ADP”) nondiscrimination test contained in § 401(k)(3)(A)(ii) and the actual contribution percentage (“ACP”) nondiscrimination test contained in § 401(m)(2). Section 401(k)(12) provides that a CODA is treated as satisfying the ADP test if the CODA meets certain contribution and notice requirements. To satisfy the ADP test safe harbor contribution requirement, an employer must make either (1) a nonelective contribution equal to at least 3 percent of each eligible nonhighly compensated employee’s compensation (“safe harbor nonelective contribution”) or (2) a matching contribution that satisfies certain minimum amount and rate conditions (“safe harbor matching contribution”). Matching contributions do not satisfy § 401(k)(12) or § 401(m)(11) if the rate of matching contributions for a highly compensated employee at any rate of elective contributions is greater than that for a nonhighly compensated employee who is eligible to make elective contributions. Also, a plan does not meet the requirements of § 401(k)(12) if, under the terms of the plan, a nonhighly compensated employee is eligible to make elective contributions but is not eligible to receive either a safe harbor nonelective contribution or a safe harbor matching contribution. Safe harbor nonelective contributions and safe harbor matching contributions must be nonforfeitable when contributed to the plan and subject to withdrawal restrictions.

Section 401(m)(11) provides that a defined contribution plan is treated as satisfying the ACP test for matching contributions if the plan meets the requirements of § 401(k)(12) and in addition meets certain limitations on the amount and rate of matching contributions available under the plan.

In Situation 1, although the plan provides for discretionary nonelective contributions, none are made for 2004 and thus only contributions described in § 401(k)(12) or § 401(m)(11) are made to the plan for that year

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

401(k)(12) is satisfied if B or C are met and C is the  nonelective safe harbor

 

(12) Alternative methods of meeting nondiscrimination requirements

(A) In generalA cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement—

(i)

meets the contribution requirements of subparagraph (B) or (C), and

(ii)

meets the notice requirements of subparagraph (D).

(B) Matching contributions

(i) In generalThe requirements of this subparagraph are met if, under the arrangement, the employer makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to—

(I)

100 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 3 percent of the employee’s compensation, and

(II)

50 percent of the elective contributions of the employee to the extent that such elective contributions exceed 3 percent but do not exceed 5 percent of the employee’s compensation.

(ii) Rate for highly compensated employees

The requirements of this subparagraph are not met if, under the arrangement, the rate of matching contribution with respect to any elective contribution of a highly compensated employee at any rate of elective contribution is greater than that with respect to an employee who is not a highly compensated employee.

(iii) Alternative plan designsIf the rate of any matching contribution with respect to any rate of elective contribution is not equal to the percentage required under clause (i), an arrangement shall not be treated as failing to meet the requirements of clause (i) if—

(I)

the rate of an employer’s matching contribution does not increase as an employee’s rate of elective contributions increase, and

(II)

the aggregate amount of matching contributions at such rate of elective contribution is at least equal to the aggregate amount of matching contributions which would be made if matching contributions were made on the basis of the percentages described in clause (i).

(C) Nonelective contributions

The requirements of this subparagraph are met if, under the arrangement, the employer is required, without regard to whether the employee makes an elective contribution or employee contribution, to make a contribution to a defined contribution plan on behalf of each employee who is not a highly compensated employee and who is eligible to participate in the arrangement in an amount equal to at least 3 percent of the employee’s compensation.

.

 

[Luke Bailey]

At this point I am thoroughly confused by this thread (which is itself confused partly because the Code and IRS guidance are not all that clear), but I'm pretty sure that 416(g)(4)(H)(i)'s reference to a CODA that satisfies 401(k)(12) means a CODA that does not need to test ADP because it satisfies either the nonelective or match safe harbor.  416(g)(4)(H)(ii)'s reference to 401(m)(11) and (12) isn't meant, I don't think, to say that you can only get out of top-heavy with the match safe harbor, but rather that if you do use the match for 401(k)(12), then the match needs to also satisfy (m)(11) or (12). Rev. Rul. 2004-13 perpetuates, unfortunately, what was a confusing statutory phrasing in the first place by including only a match in its example. Maybe the author of the Rev. Rul. didn't want to take any chances himself, given that he was providing guidance in absence of regs.

Anyway, my guess would be that you are not top-heavy based on your hypothetical facts.

[C. B. Zeller]

Thanks for all of the feedback. I do appreciate it.

This is really the part I have a problem with:

33 minutes ago, Tom Poje said:

Section 416(g)(4)(H) provides that the term “top-heavy plan” does not include a plan that consists solely of (1) a CODA that meets the requirements of § 401(k)(12) and (2) matching contributions that meet the requirements of § 401(m)(11).

The safe harbor nonelective contributions are clearly not part of (2). Under a CODA, as defined in 401(k)(2), contributions are made pursuant to the employee's election to have the contribution made in lieu of cash. If a participant does not make such an election, they nonetheless receive the safe harbor nonelective contribution, therefore the safe harbor nonelective contributions are not part of a CODA, therefore they are not part of (1) either. Therefore the plan consists of contributions other than those specified in (1) or (2), therefore 416(g)(4)(H) does not apply.

31 minutes ago, Tom Poje said:

In Situation 1, although the plan provides for discretionary nonelective contributions, none are made for 2004 and thus only contributions described in § 401(k)(12) or § 401(m)(11) are made to the plan for that year

 

Quote

HOLDINGS

In Situation 1, the plan meets the requirements of § 416(g)(4)(H) and is therefore not subject to the top-heavy rules in § 416 for 2004 because no other contributions are made to the plans other than contributions described in § 401(k)(12) or § 401(m)(11).

I think this is as good as I'm going to get - the 3% nonelective contribution is "described in" 401(k)(12)(C) and therefore it meets the requirements of 416(g)(4)(H).

Chalk this one up to poorly written laws and lack of regulatory guidance, I suppose. Thanks again for all of the input.

[Tom Poje]

I'm not so sure it is poorly written laws, but how the English language is used. But that is why they do put out Rev Rulings just to clarify things

but lets run through a few examples.

suppose the plan provides the 3% SHNEC and a discretionary match limited to 6% deferral/4% of comp. there is no requirement to actually provide a match, it is discretionary. and before you say 'if none is made you are top heavy' then fine, put 1 cent in every year.

or

to say if all you provide is the 3% SHNEC too bad since you didn't do a match then you are top heavy.

so I have a plan that provides safe harbor match and no NHCE defer, but that is ok, it is not top heavy.

Another company provides 3% SHNEC but no match. too bad you are top heavy, even though terminees also received the match, you also have to bump up anyone who entered mid year.

I would hardly think that is the intent of the law, even without other guidance.

now on to the English language. plan fails ADP test, so refund is made. the regs say plan 'may forfeit related match'. does that mean you don't have to if you don't feel like it? no, it means, even though that match might be 100%, the related match supersedes all bets and it 'may' be forfeited.

[Bird]

On 2/28/2019 at 12:00 PM, C. B. Zeller said:

416(g)(4)(H) says that a plan which consists of solely a cash or deferred arrangement and matching contributions that satisfy the safe harbors of 401(k)(12)/(13) and 401(m)(11)/(12) gets a pass on being top heavy.

I think, and it is indeed unfortunately phrased, that the simple answer here is that the word "and" which I bolded above really means "and to the extent they are made" (i.e. if matching contributions are made they must satisfy the ACP safe harbor). 

ASPA ASAP 04-06 (written by Larry Starr, so it must be true, just ask him...and yes they were "ASPA" asaps back then) makes this clear.  Of course that's not proof but RR 2004-13 says that, albeit not so clearly; unfortunately they used an example with a SH match but the point of the example was not the type of SH used but the fact that the plan allowed for nonelective contributions but didn't make any that year.

[perplexedbypensions]

This got a lot more in depth than I had anticipated.  ?

My original question was based on whether the plan would be exempt from the Top Heavy rules since the only employer contribution to the plan was a 3% Safe Harbor contribution.  We determined that yes, the Top Heavy rules were waived.

And since they were waived, we allocated a participant who entered the plan on 7/1 a 3% Safe Harbor contribution based on her 7/1 - 12/31 compensation, as the plan excluded compensation prior to plan entry.  This amount was equal to 3% of partial year comp, but since the TH rules did not apply, we did not increase the contribution so that it would be equal to 3% of gross compensation, which would have been the required minimum if the Top Heavy rules were in effect.

Thank you all for your input.  I learn more every day.  More than I wanted to learn!!!

 

[Tom Poje]

but that is what the IRS said you can do.

what I suppose is missed is that the contribution is 100% vested, even if but for part of the year. normally top heavy is subject to a vesting schedule, so the person is, in some ways, coming out ahead, along with all other NHCEs who have less than 6 years at this point in time because they all received a 100% vested contribution.