Top Heavy Failing

I have a plan.  It's top heavy.  All eligible employees receive at least an 18% contribution.  When I run the tests I am failing TH.  How can I be failing a TH test?

Eligibility is 500 hours.  2 employees work less (much less).  To pass 410b I had to override and let 1 of them in.  

What more needs to be known?

Once eligible, top heavy does not have hours requirement, only last day rule, if written in the plan document.

Is this something you have in the plan document?

yes... last day is a requirement.  

You can't really "fail" the top heavy test. The plan is either top heavy or not top heavy. If the plan is top heavy, then you have minimum allocation and vesting requirements for non-key employees. That's it.

So when you said you are "failing" top heavy, what do you mean? Is your system telling you that the minimum allocation requirement isn't being satisfied? If so, did the report from the system identify which non-key participant(s) are not receiving the minimum allocation?

How is the 18% of pay contribution calculated? Are there any exclusions on compensation (including pre-entry compensation)? The top heavy minimum is 3% of total annual compensation without any exclusions.

The only two things I can think of is that you have someone eligible employed on the last day to whom you aren't allocating a TH contribution or you have someone receiving an allocation based on their date of participation comp and (for whatever reason) that allocation isn't 3% of their full year compensation.

2 hours ago, Basically said:

I have a plan.  It's top heavy.  All eligible employees receive at least an 18% contribution.  When I run the tests I am failing TH.  How can I be failing a TH test?

Eligibility is 500 hours.  2 employees work less (much less).  To pass 410b I had to override and let 1 of them in.  

What more needs to be known?

The other one who is employed on 12/31 but not reaching the 500 hour allocation requirement isn't getting the required TH minimum is my guess.

I read it as 2 actives had under 500 hours and only 1 of those actually got the contribution.  So that would be the missing guy.

(I might even confirm that the 500 hour requirement is specifically applicable for terminees rather than actives as well, since a "standardized" plan would typically be written that way.)

Could also jump down the rabbit hole and ask if the PS allocation rate was higher than 3% to begin with.  THM of only 3% can pass coverage but could be a 401(a)(4) problem especially if cross-testing not available.

Thanks for the responses.  Here is what I did.

first, I had the plan designed as "automatically passes TH test" .  I have designed SH plans that way, but this is not a SH plan. Just a PS plan.  I eliminated that and the system made corrections.  

Second, one employee technically was terminated (retired) 11/30/2020.  He received a year end bonus that payroll counted as 2021 compensation.  So he is removed from the equation.

Third, the last employee was given a 3% TH contribution.  Still employed as of the end of 2021 but below the hours requirement.  I learned he should still get the TH minimum.  

Make sense?