Is there a common practice for the threshold of HCE's and when you should think about Top Heavy

[dragondon]

Obviously there are so many things that go into making a plan top heavy, including how much each participant contributes, who participates in the plan, and which participants contribute more ect. But is there a threshold that is common practice in the industry to say if you have x% or more HCE's than NHCE's then you should use the Top Paid Group?

[John Feldt ERPA CPC QPA]

No. The design itself matters more.

If you have a small employer and the owners hope to maximize their own benefits/contributions and minimize all others, the top paid group election can change non-owner HCEs into NHCEs. The NHCEs generally have minumum gateway requirements that can cost much more than a mere top-heavy minimum that they would get as an HCE. Applying the TPG election here could add a lot of non-owner benefit costs and/or cause the employer to not adopt the plan at all.

However, other design scenarios might benefit when the TPG election is applied. Such as a 401(k) plan that is not providing safe harbor and has some highly paid employees deferring at a high rate. In that case, changing those non-owner HCEs into NHCEs can result in a higher ADP for the NHCE group.

So look at the census (usually TPG is irrelevant), review the employer goals, run the design, and that should help with how the election should be made.

Also, pretty sure the HCE definition must be the same if they have multiple plans. So if a new plan is to be established now for 2022 for an employer that already had a plan in place for 2022, then they have no choice; they cannot just default the TPG election. It must be the same as the TPG election in that existing plan.

[truphao]

I confirm that the HCE definition must be consistent across all the plans sponsored by Employer.  Also, the original question lumps together 2 different concepts: non-discrim (HCE definition) and ownership (key employees).

[BG5150]

14 hours ago, dragondon said:

Obviously there are so many things that go into making a plan top heavy,

What does the definition of an HCE have to do with a top heavy plan?

[John Feldt ERPA CPC QPA]

I guess I took the post as two questions and only answered one of them. So for the second question, when to think about top-heavy, how about: every year. 

[BG5150]

Is the OP concerned with the plan being top heavy or failing one or more nondiscrimination tests?

Obviously, top heavy must be considered every year (unless deferrals and safe harbor are the only contributions in a given year).

For HCE determination consider this:  is the plan going to fail any relevant nondiscrimination tests?  for how long?  Is it a one-off or will it be an ongoing concern?  If the tests are passing, just keep the status quo.

When considering the TPG feature, you obviously have to have more than 20% of the relevant workforce earning more than the HCE limit in the prior year.  (Remember, this HCE calculation is independent of the ownership criterion.)

But that's not where it ends.  You need to look at the contribution patterns for those otherwise-HCE outside the top 20%.  Are they contributing?  At what rate compared tot he NHCEs?  I had a plan, for simplicity sake, had 100 employees/participants in the TPG analysis.  Of which, 25 made more than the HCE limit.  Someone decided the TPG would be great since they could limit the number of HCE in their testing.  However, the bottom (by comp) eight or nine people were deferring at either zero or a lower % than the other NHCEs.  So, in this case, the TPG hurt the ADP testing.

A couple things to remember:

TPG has NOTHING to do with Top Heavy.  The only way Key EEs are limited is when you have a ton of officers.

The plan must be amended to change to/from TPG.  So, if the idea is to project which method is better for any given year, be prepared to absorb the cost of a plan amendment every time it changes (at that cost cannot be paid out of plan assets...).