Top Heavy & catchup question

Plan has two key employees who are the only HCE.  Plan passes ADP test b/c they defer low amounts, let's say $3,000 each (and they each make $100,000) for simplicity.  Both are over age 50.

The Plan is top heavy.

Because they aren't failing the ADP test, nothing is re-characterized.  They did not run afoul of any other limits.

Do they owe the 3% TH?  Or can we say b/c they are both over age 50 and their deferrals were less than $6,500, they can be considered catch-up and not used in determining the Key employee allocation for the year?

(There are no employer contributions.)

On the face of it, yes, they owe the top heavy minimum.

Personally, I am of the opinion that you can do the following:

1. Shift all NHCE deferrals into the ACP test
2. The ADP test now fails; since the NHCE average is zero, the max ADP for the HCEs is zero
3. Correct the failed ADP test by reclassifying all of the HCEs' deferrals as catch-up
4. No more top heavy minimum

I don't see any reason why this wouldn't work, but I am also not aware of it having ever been met with approval by the IRS on an audit.

A better approach would be to set a deferral limit of $0 for HCEs in the plan document. Any deferrals would then automatically get reclassified as catch-up by exceeding a plan-imposed limit.

Update:  one of the Key EEs is under 50.  I thought they were brothers, but the owner is the father and the otehr key is the son.  Ages 60 & 28.

Man, that’s brilliant and abusive all in one 😁

On 11/16/2021 at 5:21 AM, C. B. Zeller said:

On the face of it, yes, they owe the top heavy minimum.

Personally, I am of the opinion that you can do the following:

1. Shift all NHCE deferrals into the ACP test
2. The ADP test now fails; since the NHCE average is zero, the max ADP for the HCEs is zero
3. Correct the failed ADP test by reclassifying all of the HCEs' deferrals as catch-up
4. No more top heavy minimum

I don't see any reason why this wouldn't work, but I am also not aware of it having ever been met with approval by the IRS on an audit.

A better approach would be to set a deferral limit of $0 for HCEs in the plan document. Any deferrals would then automatically get reclassified as catch-up by exceeding a plan-imposed limit.

I thought I read somewhere in the past that setting a deferral limit of $0 or 0% means that NO deferrals can be made, including catch-up, since catch-up is a deferral and no deferrals are allowed.

15 hours ago, chc93 said:

I thought I read somewhere in the past that setting a deferral limit of $0 or 0% means that NO deferrals can be made, including catch-up, since catch-up is a deferral and no deferrals are allowed.

I think there is a discussion about in in the EOB. If you are worried about it, put in a limit of $1 instead.

So, in the absence of anything making the deferrals a catch-up, they will have to make the TH contribution.

I don't want to hamper the HCE from making more than just the catch-up.