Top Heavy Safe Harbor Plan

[Below Ground]

Plan is a 401(k) Safe Harbor Plan that includes a New Comparability Profit Sharing Allocation.  The Key Employees only "participate" in Deferrals and Safe Harbor Matching.  Due to the inclusion of a life policy which has premium paid by Profit Sharing Contributions, there is one Non-Key who get a Profit Sharing Allocation.  Does the inclusion of this Nonelective Contribution to one Non-Key Employee (which does provide Minimum to this person) require that a Top Heavy Minimum be provided to other Non-Key Employees?  I suspect the answer is "yes" since the Plan is doing a contribution above the "Safe Harbor Contributions", even though that contribution only goes to Non-Key Employees.

[Lou S.]

My understanding is once you have $1 dollar allocated that doesn't meet the exemption, the Plan loses the "deemed not top-heavy status", there is no distinction in the code as to whether that allocation goes to key employees or non key employees.

A work around though possibly not practical is to set up a 2nd plan profit sharing only that covers only the participant getting the allocation and spin his policy into that newly created plan. That only works if the participant is an NHCE or you'll violate BRF but I'm hoping he is an NHCE already or you might have the same problem within the current plan.

[Belgarath]

Does the participant's existing account have sufficient assets and "aged money" that the future premium could be paid from existing account, (if the plan allows for it, and you can stay within the incidental limits) and thus no actual employer PS contribution is made? Might help in the future...

[Bri]

Agree with Belgarath - use already-plan money to pay the premiums as an "investment transfer."

[Bill Presson]

Staying within the incidental limits is key. People often think you can use the "aged" money and just avoid the incidental limits, but that's just treated like an in-service withdrawal.

Likely better to look at transferring the policy out of the plan.

[Belgarath]

I couldn't agree more - I was careful to note that incidental limits must be satisfied!

[CuseFan]

If what Lou said is true then isn't the TH exemption lost forever regardless of what you do with that policy and related contributions prospectively?

[Lou S.]

37 minutes ago, CuseFan said:

If what Lou said is true then isn't the TH exemption lost forever regardless of what you do with that policy and related contributions prospectively?

The "deemed not Top Heavy" is a year by year determination. Get rid of the policy or the premiums driving a contribution and you get rid of the problem in the future. Doesn't help for 2022 but if the premium hasn't been paid already by the company in 2023 there may be time to fix it.

[ErnieG]

Another solution may be see if you can reduce the face amount of the life insurance to maintain the survivor benefit, or place the policy on a reduced paid up status.  After that the Plan Document would have language regarding the minimum face amount that must be met in order for the individual to purchase a policy which would limit the ability for this individual to have insurance if they do not receive a high enough contribution to pay the premium.

[Below Ground]

First, thanks for all your replies.  They provided very good insights, and confirmed what I felt pretty sure was the case.  This was a "take-over case" which one issue we immediately raised was the fact that incidental limits were not even considered under the prior service.  In fact, it was clear that those limits were quite simply ignored.  For example, for that one person Non-Key Employee, the ONLY asset held under that person's account was the whole life policy!  In short, there are no side fund assets from which to pay the premiums!  It was something that the had company paid each year, and accounted for 100% of that person's account!  I should note that the plan was setup originally with only whole life policies and 100% of the contributions being allocated to premium payments, and that this was done by a "good friend" who was the agent on the policies (of course).  We did discuss the options available, including a VFCP Submission, and are in the process of cleaning up the mess inherited.  Participants are being given the options of having the policy converted to a paid-up basis, cash surrendered to the Plan, and in some cases the purchase of the policy from the Plan.  Anyway, I do appreciate the insights!

[ErnieG]

I believe if this is not corrected immediately the failure of the Incidental Benefit Rule could disqualify the plan.  

[Belgarath]

Without knowing all the facts, # of years of non-compliance, plan assets and premium amounts, etc., I'd be a little surprised if the IRS would allow a normal  VCP fix on this. This is what I'd call an "egregious" failure. But, if you do submit, I'd try the anonymous procedure first - might at least give you some indication if/how it might be corrected.

Edit - I'd like to soften this stance a bit - for some reason, I had it in my head that this was a 1 person plan, and re-reading it, I can't imagine how I got THAT idea stuck in my head. So there may be a lot more room for fixes here.

[austin3515]

I have a very very very very high degree of expertise in life insurance policies. In fact I can teach anyone everything they will ever need to know about life insurance in just a few short words: 

Avoid life insurance in plans at all costs!!!

This has been a Public Service Announcement.

[Belgarath]

But, are you as good as Ned Ryerson?

[austin3515]

 

[austin3515]

I had to google it, LOL...

[Ilene Ferenczy]

Two more things to consider.  Insurance in a plan is a benefit, right, or feature.  If the insurance was offered only to the HCE, you have a discrimination problem.  (Even if it's a voluntarily added benefit, the fact it wasn't offered can create a discrimination situation.)  In addition, if your plan doesn't permit insurance (as many preapproved documents have a provision where you select whether the plan allows insurance), you have an operational failure for allowing it to be in the plan.  Just sayin' ...

[CuseFan]

2 hours ago, Belgarath said:

as good as Ned Ryerson?

only on 2/2 I imagine

[Below Ground]

I think most people who have been in this business for a few years, have come across a plan that they wish they never heard about.  In this case, the history was a mess.  Things like no valuations for years, etc...  A case brought by a broker who normal brings good business basically begged that we do what we could to clean up a true mess.  The incidental limits were addressed from day one, and ignored form day one.  Anyway, the Plan does allow for insurance.  Policies were purchased for by HCE and NCE.  (sold by Ned Ryerson?)  The problem is that for one NCE (Non-Key too) they purchased a policy that just ate up 100% of her employer contribution.  (She does no deferrals.)  The topic was immediately brought up and the Client advised that they had this, and other problem.  We fixed those other issue, but since the premium payment averages between 7% and 10% of annual compensation, and the incidental limit is 50% for whole life, the sponsor decided to ignore the incidental limit.  They were not going to pony up additional contributions to balance out the incidental limits.  Bottom line, they would continue to pay the premium and nothing more, even though we protested loud and long.  Beyond the annual notice of noncompliance, and my belief that putting my gun to the head of the Client would achieve nothing, there is nothing we can do.  As stated earlier, VFCP was recommended and passed up.  Like I said, a case we regret having; but we did fix other issues like valuations not done for years and late 5500 filed under delinquent filer program.  You can take the horse to water, but you can't make it drink.  Again, I appreciate the comments and the remarks of caution, as they do apply.

[ErnieG]

 Below Ground well said, we can only advise…and document.  Whatever comments about plan design, or investments, including life insurance, are usually set up prudently and administered properly.  However, something seems to happen from establishment to the time we get involved. Life insurance set up for a need as a survivor benefit and overseen and administered properly is a benefit welcomed by participants and beneficiaries (in my 25 plus years with experience dealing with life insurance in qualified plans I have never had a beneficiary complain about an income tax free death benefit, not have I had a client complain about an exit strategy).  Good luck with this case.
 

[Bird]

If the policy has been around for any length of time they should not have to pay premiums - let it APL (Automatic Premium Loan; confirm that is the default but it almost always is). Then at least you stop the bleeding while you figure out how to get rid of the policy.