Is top heavy required under 401k plan?

[Jakyasar]

Having a discussion about the following:

Combo DB/401k plan, top heavy

For 2023, owner and spouse are the 2 participants in the 401k and only owner is in the DB (spouse does not work enough hours to be eligible - assume all kosher).

They hire an employee who will become eligible in both plans as of 1/1/2024. Employee makes big bucks in 2023 therefore HCE for 2024.

During 2024, employee will be 20% owner (not as of 1/1/2024 though). Let's say employee will be a 20% owner on 3/1/2024.

DB plan has 0.5% of pay formula and states all top heavy is provided under 401k plan. Employee will be in the DB plan for 2024 so no 401a26 issue.

401k plan's top heavy provision states for both key and non-key.

For 2024, owner defers max and employee will not defer. There will be no PS allocation. 

Employee is not excluded under the 401k/PS categorically.

So, does this employee need to get any kind of top heavy allocation for 2024?

What am I missing here?

Thanks

[C. B. Zeller]

Yes, the employee needs a top heavy minimum for 2024, because

18 hours ago, Jakyasar said:

401k plan's top heavy provision states for both key and non-key.

So whether or not the employee is Key for 2024 doesn't matter. The owner and spouse will need a top heavy minimum too.

For the record though, the employee is non-Key for 2024. The 5% owner test (as well as the 1% owner test and the officer test) are made on the basis of the plan year containing the determination date; in other words, the prior plan year (most of the time). See 1.416-1 Q&A T-12

[Jakyasar]

Hi

Thanks for the input.

Employee is key for 2024 because had enough salary for 2023 and also an officer.

Otherwise, i agree that they need top heavy minimum for 2024.

[Paul I]

On 1/5/2024 at 5:22 PM, Jakyasar said:

Employee makes big bucks in 2023 therefore HCE for 2024.

Out of curiosity, how big were the "big bucks" for the employee's salary in 2023?  The HCE threshold in 2023 is $150,000 and the Key Employee-Officer threshold in 2023 is $215,000.

[Jakyasar]

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