Top Heavy Minimum in Combo Plans

[401kWhisperer]

Hello, we have an employer with 3 plans: cash balance, 401(k) safe harbor match and profit sharing only.  

If we state in the PSP document that the 5% top heavy minimum will be funded in this plan, are we ok if the SHM offsets it in the 401(k) plan? 

Example, employee defers 5%, receives a 4% SHM in the 401(k) plan.  They need to receive an additional 1% to satisfy TH.  We allocate that in the PSP.  Will this pass muster since the PSP only shows 1%?  

thanks!

[Bri]

you need to state in the CB document that the 5% THM will be handled under the DC plan.  

but then, sure, the person needs to get a total of 5% and 4 of that can be the match.  

insert disclaimers about gateway minimums, though, here.....

 

[CuseFan]

3 hours ago, Bri said:

under the DC plan

But the point / question was there are two DC plans - a 401k SHM and a separate PSP.

If you are satisfying TH with contributions to both DC plans then CB document should note that and probably both DC plans in some fashion. Statutorily you satisfy TH with 4% SHM and 1% PS but unless you provide TH minimum according to the provisions of EACH document you're going to have an operational defect under one or more plans for not following the terms. AA agreements for these plans easily provide the means to spell this out.

I suspect your inquiry is with respect to HCEs because NHCEs would be needing more PS for gateway as Bri mentions.

[401kWhisperer]

2 hours ago, CuseFan said:

But the point / question was there are two DC plans - a 401k SHM and a separate PSP.

If you are satisfying TH with contributions to both DC plans then CB document should note that and probably both DC plans in some fashion. Statutorily you satisfy TH with 4% SHM and 1% PS but unless you provide TH minimum according to the provisions of EACH document you're going to have an operational defect under one or more plans for not following the terms. AA agreements for these plans easily provide the means to spell this out.

I suspect your inquiry is with respect to HCEs because NHCEs would be needing more PS for gateway as Bri mentions.

Thanks, we are just trying to draft the plan document for the profit sharing plan.  We noticed this language right under that section in the adoption agreement: 

Note: Satisfying the Minimum Top-Heavy Allocation in another plan for some but not all of the Participants may cause the Plan to fail to satisfy the uniformity requirement of Treasury Regulations section 1.401(a)(4)-2(b)(2)(ii) for plans using a design-based safe harbor, even though all other requirements of the safe harbor are met

In our projection, two of the NHCEs are receiving large PS allocations, so they are good with the gateway.  The 3rd NHCE is only receiving 3.30% PS.  But also a 4% SHM in the 401(k) so originally we were like it's good.  But now drafting the document realizing, we need to bump this one up to receive an additional 1.70% to reach 5% in the PSP.  we thought about putting language stating that the top heavy will be offset by the SHM in the 401(k) plan but based on that "Note" and what you said above, I don't think we  can do that.  

 

[Bri]

If you're going to general-test the allocations anyway, is it an actual problem to no longer potentially have the safe harbor uniform formula alluded to in that Regulation?

 

(And I apologize, earlier I missed that the DC was actually two distinct plans.)

[CuseFan]

Exactly, since not using a design-based safe harbor in the PSP, uniformity doesn't matter. Having to do gateway likely means doing at least 5% in PSP, if not more, as gateway could be 7.5%, so with TH satisfied in PSP why even bother with SHM offset? The only reason would be if there were non-key HCEs that needed TH but not gateway. Your PS document could probably specify that. For example, "Top-heavy minimum allocations shall be satisfied in this Plan except that the minimum allocation for any Non-Key Employee who is a Highly Compensated Employee shall be offset by any safe harbor matching contribution allocated to such Employee in the XYZ Company 401(k) Plan."