Top Heavy

[Walter]

We have a client, Company A, who sponsored a safe harbor match 401(k) plan. The plan is top heavy for 2019. On 10/01/2019 Company A sold all Company A's assets to Company B. All the owners of Company A became employees of Company B and have no ownership in Company B. Effective with the assets sale on 10/01/2019, Company B took over sponsorship of Company A's 401(k) plan. Going into 2020 Company B would like to amend eligibility to be immediate upon date of hire for salary deferrals but still require 1 year of service to receive the safe harbor match. Would the plan be considered top heavy for 2020 requiring that participants eligible to defer but not eligible for the safe harbor match be given a top heavy benefit?

[Mr Bagwell]

I would say yes to being Top Heavy in 2020 because it's the same plan. 

So with a dual eligibility situation coming into play, the eligible (for deferrals) employees would need a top heavy contribution if they are not eligible for the safe harbor match.

AND, you get to test the plan for ADP as well for those that are not eligible for the safe harbor match.  It's not normally an issue that an employee would become HCE immediately upon hire, but it can happen.  Ex:  owner with greater than 5% ownership hires wife and she maxes out deferrals in first year.

I'm not a fan of dual eligibility for safe harbor plans, but to each his own. 

[Walter]

So if Company B terminated the plan and started a new plan effective 01/01/2020 would that solve the problem? I agree about the ADP test but that should not be a problem but would be monitored.

[Lou S.]

If Company B did not want a top heavy 401(k) plan it should not have assumed sponsorship of company A's plan, I would have thought that would be part of the due diligence.  Rather it should have started a new 401(k) and let Company A wind down the old 401(k) plan.

I'm not sure how you get around the successor 401(k) plan rules if you terminate the Plan now.

[BG5150]

Did B have a plan in 2019 with deferrals? If so, they can't have another 401(k) plan for 12 months after the last deferrals are distributed from the terminated plan

 

[Walter]

Company B has never had a plan.

[Lou S.]

30 minutes ago, Walter said:

Company B has never had a plan.

Company B has had a 401(k) Plan since October 1, 2019 when they took over sponsorship of Company A Plan.

[Mr Bagwell]

Walter,

What is the "problem"?  A possible top heavy contribution to newly eligibles after 1/1/2020?  The solve is to convince them to leave the Plan alone for 2020 and discuss next year.

If they are diehard to amend the plan.  So be it, let them know a top heavy is required and ADP testing is needed.

You're not in a horrible spot.  You just have some explaining to do.