What problems do you face if you use Matching Contributions to satisfy

[Guest Kevin Plymyer]

I am reviewing a plan that wishes to use their matching contributions to help satisfy their Top-Heavy minimum. The plan is a non-standardized prototype and the matching is discretionary. I realize that the matching can no longer be used in the ADP or ACP test for the non-keys which will most likely cause a problem passing the discrimination test. Can anyone think of other pitfalls or hidden catches that may hurt this client if they do in fact use the matching to help satisfy the Top-Heavy Minimum?

[mming]

I'm under the impression that if a 401(K) plan is top heavy, one must contribute the top heavy minimum amount in addition to the matching contribution, i.e., matching contributions cannot be counted as any part of the required top heavy minimum contributions. Also, I believe even discretionary matches can be used in the ACP test for NHCEs.

[Richard Anderson]

Kevin,

You are correct that matching contributions can be used to satisfy the top heavy requirements, but cannot be included in the ACP test if used to satisfy TH.

I have an additional question.

If the plan document says that both Key and non-key participants will receive the top heavy contribution, then, for the ACP test, should you not count both Key and non-key match contributions that went to satisfy the TH requirement?

Example: Key and HCE participants are the same (no non-key HCEs). Plan matches 100% of first 3% deferred. The ACP of HCEs is 3%. The ACP for NHCEs is 1%. Match is used to satisfy the 3% top heavy requirement, so that the HCEs receive no further contribution for TH, but the NHCEs get an additional non-elective contribution to bring each to the 3% TH minimum. If you exclude the match used for TH for both Key and non-key, then you will be excluding all of the match in this example. The ACP for HCEs would be zero and the ACP for NHCEs would be zero.

If the above example is correct, can the employer then do an additional discretionary non-elective contribution?

Also, how specific does the document need to be about where TH minimum contributions will come from? In order to use match to satisfy TH minimum, would the document need to specifically allow that?

[Guest]

Richard:

1.416 M-19 says 'if the plan uses contributions alloacted to eployees OTHER THAN KEY employees....'

so no, it does not appear you can use the key ees to satisfy the top heavy.

it is possible, though not probable, you could fail 401(a) testing. if there were a numbers of non key HCEs you have to do further testing.

[R. Butler]

I would also be careful that the document even allows you to use the match to meet top heavy. I have seen more documents that don't allow it than do allow it.