Top Heavy Contribution Requirement

Got into a debate with a colleague and I'm 99% sure I'm correct but wanted to confirm (sorry if this is a dumb question, just want to make sure!)

Plan is Top Heavy for 2020.  The only contributions made into the Plan in '20 was the one Key employee making a 401(k) contribution (no other Employer money has been contributed).

Based on the 401(k) being made, they are therefore required to make the 3% Top Heavy to all non-Key employees, correct?

If the amount of the deferral was less than 3% of the key employee's compensation, then the top heavy minimum would be less than 3%.

If the only contribution were a catch-up contribution (because it was reclassified due to a plan-imposed limit, or a failure of the ADP test, for example), that would not trigger the top heavy minimum.

If any key employee received a contribution of at least 3% of compensation, including elective deferrals, then all non-key employees who are actively employed on the last day of the plan year must receive a top-heavy minimum contribution of 3% of compensation.

This ignores the case of a safe harbor plan, for example a plan with a safe harbor match that excludes HCEs from the match. If no non-HCEs deferred and the only contributions to the plan for the year were deferrals made by a key employee (who is also HCE), then in that case there would be no employer contributions and also no top heavy minimum would apply.

This is exactly what I thought.  None of the non-Key EE deferred and the Key maxed out ($26k). 

Thanks for confirming!

They are probably required to make a top heavy minimum contribution to all non-key participants employed on the last day of the plan year. You will want to check the document, because some documents say the TH contribution goes to all participants, not just the non-keys. The document will also specify whether the contribution is 3% or the lesser of 3% or the highest key benefit rate for the year.

I say "probably" above because they failed the ADP test, so whether or not your key is eligible to make catch-up contributions will make a difference here. To the extent the ADP excess can be recharacterized as catch-up, it would not "count against" the calculation of the key's benefit rate for TH minimum purposes.

edit: Beaten to the punch! Since the key maxed out it does look like they're stuck with the 3%.

Time to make this plan a Safe Harbor Match plan.

If they have a bunch of non-key HCEs in the plan, look at doing a retroactive 4% safe harbor nonelective to only the NHCEs for 2020 and if you had no other contributions, the plan becomes exempt from top-heavy.

The question then becomes whether the extra 1% over the TH is less costly than the tax savings due to the refund.  The refund has to be $19,500 (plus earnings) if no one else deferred.