Top Heavy Plan Minimum Contributions

[Ananda]

A 401(k) plan has been deemed Top Heavy and will begin making minimum contributions to non-key employees who are plan participants. However, there is a group of employees who are eligible to participate in the plan, but absolutely refused to do so because the funds offered by the plan invested in companies that have poor records regarding the environment. If a non-key employee is eligible to participate in the plan but absolutely refuses to do so, should they be receiving minimum contributions or can the plan sponsor argue that only employees that enrolled in the plan should receive minimum contributions.

Regulations Section 1.416-1 Q&A M-10 states that non-key employees that are "participants" in a top heavy plan must receive minimum contributions and ERISA 3(7) defines "eligible employees" as participants. However, Q&A M-12 refers to "employees covered under the plan" as receiving minimum contributions and I could argue that these non-key employees are not "covered" under the plan. Any thoughts? 

[BG5150]

They must get the contribution.  Isn't there a cash, or cash-equivalent fund in there somewhere?

If not, maybe the Trustee should think about adding one.

[Peter Gulia]

While I lack knowledge about the top-heavy rules, I suspect questions about who is a participant or is “covered by the plan” might be resolved using concepts similar to those discussed last week https://benefitslink.com/boards/index.php?/topic/68399-spd-provided-to-employees-eligible-to-participate-in-plan/.

If so, an individual might become a participant when the individual has met the plan’s age, service, and other eligibility conditions.

Further, the rule (at M-10) states:  “A non-key employee may not fail to receive a defined contribution minimum because . . . the employee is excluded from participation (or accrues no benefit) merely because of a failure to make . . . elective contributions.”  https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.416-1

[Bird]

2 hours ago, Ananda said:

However, Q&A M-12 refers to "employees covered under the plan" as receiving minimum contributions and I could argue that these non-key employees are not "covered" under the plan. Any thoughts? 

There is not one iota of doubt about them being participants.  As far as where to invest the money, there should be a default fund.   If they don't like it, they can move it to cash or wherever.  

[CuseFan]

The only way they could be excluded is if the plan had the provision for and they signed an irrevocable election not to participate in the employer's qualified plans before becoming eligible to participate. Such is a very rare occurrence and this does not exclude electing employees from coverage and nondiscrimination testing populations. Note this is NOT the same as declining to make salary reduction contributions.

[Ananda]

Thank-you for your responses. this is helpful