Top Heavy and Secure 2.0

[tpa_girl]

I am having a hard time finding how Secure 2.0 will actually impact Top Heavy.  I know Top Heavy Rules were changed so now non-excludable and excludable can be tested separately and the Top Heavy minimum can also be allocated to just the non-excludable.   I know the provision applies to plans starting after 12/31/2023, but we have differing thoughts on when these options will actually start affecting plans.  The prevailing thought is that in order to allocate the Top Heavy minimum to just the non-excludable, the actual Top Heavy must be disagg as well.  Since the determination date is the last day of the prior plan year, the consensus is we cannot use the non-excludable option for the minimum allocation until 2025.  Another thought is that they are independent of each other, that you can run test with all employees but then allocate the Top Heavy minimum to just the non-excludable employees.  I am of the former opinion as I do not see the benefit of using disagg for Top Heavy Test since the more Non-Key balances the better for the percentage.  My thoughts are the only way it makes sense to split the test is so you can get the benefit of allocating the top heavy minimum to the non-excludable, since more likely than not there are no excludable key employees which makes the test 0%.  Basically I think you have to allocate the Top Heavy Minimum in the same manner as you ran the test.  Thoughts?

Another thought that is confusing the issue, is what if there is a Key employee who is in the excludable test, so that test is actually top heavy?  With ADP/ACP and Coverage, we know there is the option to disregard the excludable employees from the test.  I haven't see that spelled out for Top Heavy as yet, and if my previous observation is accurate and there is a Key employee who is excludable and that test is technically "top heavy" does that mean that those excludable employees now need a top heavy minimum?

 

[C. B. Zeller]

You're overthinking it. Nothing in SECURE 2 says that top heavy is "tested separately" and to be honest I don't know where this common misunderstanding is coming from. The top heavy determination is still done based on all participants in the plan. There is no disaggreation for determining the top heavy ratio.

What section 310 of SECURE 2 says is that, for plan years starting in 2024 and later, otherwise excludable employees no longer have to receive the defined contribution top heavy minimum. That's it.

[RatherBeGolfing]

On 9/13/2024 at 9:15 PM, C. B. Zeller said:

to be honest I don't know where this common misunderstanding is coming from. 

Many of the S2.0 summaries and webinars have referred to it as testing separately.  I think that's where alot of the confusion is coming from. 

[Bri]

I kept it straight by realizing the same new early-eligible people who are dropping the TH ratio from 61% to 59% get absolutely no thanks for it from anyone other than the owners.

"You cost us a top heavy minimum even though you weren't qualified to even get it in the first place."

[tpa_girl]

This makes perfect sense to be honest.  At first when I read Sec 310,  it it only mentioned adding a subparagraph to 416(c) which refers to the top heavy minimum, but RatherBeGolfing is right, every webinar and article refers to separate testing and it made me doubt myself.  I guess my next thought is, will it be the same standard as with ADP/ACP and Coverage when determining excludable employees?  We normally use CCA 201615013 Option 1 as the standard and did not know if there has been clarification on whether or not this will be the standard under the Top Heavy rules as well?

[C. B. Zeller]

If I'm understanding you correctly, your question is about the application of entry dates when determining who is an otherwise excludable employee. The Chief Counsel memo that you referenced essentially says that, in the context of 410(b) and 401(k)(3) (and presumably 401(m)(2) and 401(a)(4) as well, although not explicitly stated), there is more than one way to apply it, so anything reasonable is fine. I don't see why it would be any different for 416, and in the absence of explicit guidance, I am perfectly comfortable using the same interpretation.