Use non-safe harbor Match for Top Heavy Minimum?

[Guest RJM]

Top Heavy 401k uses enhanced match (100% up to 4%) for Safe Harbor. (Yes, he should have used the non-elective safe harbor but there are still a few hard headed folks out there.) Plan also provides non-safe harbor fixed match of 50% up to 6%.

Since the fixed match is safe harbored from 401(m)testing, it appears that we can use the non-safe harbor match to satisfy (as much as possible) the top heavy minimum, provided it passes under 401(a)-4. Employer will then fund any unfulfilled top heavy minimums. Does anyone have any experience with something like this?

[Bob R]

I don't have any experience with this. The argument makes sense. But, you might want to check out (I don't have the regulations handy right now) is the language in the 416 regulations that permits the use of the match to satisfy the top heavy minimum. The issue is whether it recharacterizes the match as something other than a match for all purposes of 401(a)(4) or just for nondiscrimination as to contributions. The reason that makes a difference is because of the benefits, features and rights (BFR) section of the (a)(4) regs. If the match is no longer a match for purposes of that section of the regs, then you might have a problem. The "rate" of a match is a must be tested under the BFR section of the regulations. If the match is no longer a match, then the HCEs may have a higher rate of match than the NHCEs becasue some of the NHCEs (the non-key HCEs) are not receiving the match. Just something to think about.

[Guest]

ouch, ouch, and ouch again. this sounds like one of those plans I only dreamed wouldn't exist.

by the way, if the plan is standardized, there is no use discussing using the match to satisfy top-heavy since that is supposed to be a no-no.

lets suppose a worst case where you don't use the match to satisfy top heavy.

you have the following:

4% safe harbor match.

3% possible discretionary match.

3% top heavy

4% avg deferral rate

that is 14% already. you have gotta be close to the maximum deductible contribution. watch out for that!

I think Bob is correct there are other non disrim issues to worry about, especially if there is a difference between key employees and HCEs.