Top Heavy plan excludes HCEs, no profit sharing, but what if an HCE is non-key?

[Tom]

We have a plan that excludes HCEs from the 3% non-elective safe harbor.  Several HCEs are non-key employees.  There is no employer contribution other than the 3% safe harbor.  The question is - do the non-key HCEs have to receive a 3% profit sharing contribution since the plan is top heavy?  The plan passes coverage on the safe harbor since the only ones excluded are a couple HCEs.

Thank you,

Tom

[John Feldt ERPA CPC QPA]

No, but check the plan document. Normally if the plan has only deferrals and safe harbor allocated, then it is exempt from top-heavy. Meaning no allocation is necessary for the NonKey HCEs who aren’t getting the safe harbor contribution.

[Bri]

agreed - the document language may allow the HCEs to be SOL, so to speak.

[BG5150]

1 hour ago, John Feldt ERPA CPC QPA said:

Normally if the plan has only deferrals and safe harbor allocated, then it is exempt from top-heavy.

It's not exempt from top heavy, it simply is not top heavy.  From 416(g)(4)(H): (bold emphasis mine)

   (H)Cash or deferred arrangements using alternative methods of meeting nondiscrimination requirements

     The term “top-heavy plan” shall not include    a plan which consists solely of—

        (i) a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13), and

        (ii) matching contributions with respect to which the requirements of section 401(m)(11) or 401(m)(12) are met.

[John Feldt ERPA CPC QPA]

Tomato, tomahto

[Tom]

Thank you all - yes the plan document provides that HCEs do not receive the safe harbor non-elective contribution.  And only safe harbor non-elective is funded - no profit sharing. 

I question because it seems to skirt the intention of the top heavy rule when an HCE is non-key and thus gets nothing from the employer.  I questioned this in reviewing a 2022 calculation and went back and looked at 2021 and saw that a couple HCE non-keys did not get top heavy for that year.  I must've researched this for 2021 and came to the same conclusion.  

Tom

[CuseFan]

Is there a profit sharing provision that has just not been utilized or does the document specifically limit contributions to deferrals and safe harbor? I seem to recall past discussions that a PS provision could make plan subject to top heavy, but I'm not sure and don't deal with these (deferral and SH-only) plans.

[Lou S.]

11 minutes ago, CuseFan said:

Is there a profit sharing provision that has just not been utilized or does the document specifically limit contributions to deferrals and safe harbor? I seem to recall past discussions that a PS provision could make plan subject to top heavy, but I'm not sure and don't deal with these (deferral and SH-only) plans.

The mere fact that the plan has a PS provision will not trigger losing the TH exemption. There has to be an actual allocation of contributions or forfeitures to lose the exemption.

[CuseFan]

Thanks Lou.