Top- heavy relief included in SECURE 2.0!!

Awersome article from Groom Law.  But in a sea of bad news, this almost makes it worthwhile...  I haven;t seen yet if they fixed the issue where a top-heavy safe harbor match plan can avail themselves of immediate eligiblity and a 1 year wait to avoid blowing their top-heavy exemption. That would for sure be a disappointing exclusion but regardless this is pretty awesome for a lot of plans.

https://www.groom.com/resources/secure-2-0-hitches-a-ride-just-in-the-st-nick-of-time/

Well maybe this new rule will cover it.  Honestly if it doesn't cover the Safe Harbor match top-heavy plans that is just too bad.

austin3515, if it helps you, here’s the whole text of SECURE 2.0 Act of 2022 § 310:

SEC. 310. APPLICATION OF TOP HEAVY RULES TO DEFINED CONTRIBUTION PLANS COVERING EXCLUDABLE EMPLOYEES.

       (a) IN GENERAL.—Paragraph (2) of section 416(c) is amended by adding at the end the following new subparagraph:

       “(C) APPLICATION TO EMPLOYEES NOT MEETING AGE AND SERVICE REQUIREMENTS.—

       Any employees not meeting the age or service requirements of section 410(a)(1) (without regard to subparagraph (B) thereof) may be excluded from consideration in determining whether any plan of the employer meets the requirements of subparagraphs (A) and (B).”.

       (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to plan years beginning after December 31, 2023.

Excellent, very excellent.  That sounds good enough to me!  The sole impediment to immediate eligibility will be the audit now! 

Well, maybe. The reason that safe harbor match plans which have earlier entry for deferrals than for the safe harbor match are not exempt from top heavy is not because of anything explicit in the law; it's because the IRS interprets the term "solely" as it appears in sec. 416(g)(4)(H) to not include a plan where only a portion of the employees eligible for deferrals are eligible for the safe harbor match - see rev. rul. 2004-13.

SECURE 2.0 sec. 310 says that you do not have to look at employees who have not met the minimum age and service requirements of sec. 410(a) when determining if the plan satisfies the top heavy minimum; however it does not modify the definition of top heavy plan in 416(g)(4)(H).

The new law is certainly an improvement with respect to employees who have not met the minimum age and service requirements, for other employees, celebration may be a bit premature. We should wait and see what the IRS says.

On 12/24/2022 at 10:57 AM, Peter Gulia said:

Any employees not meeting the age or service requirements of section 410(a)(1) (without regard to subparagraph (B) thereof) may be excluded from consideration in determining whether any plan of the employer meets the requirements of subparagraphs (A) and (B).”.

Congress intended to allow plan sponsors of small top-heavy plans to allow their hardworking employees to contribute from their date of hire.  If the IRS does not bear this in mind when analyzing this language it would be most unfortunate working Americans.  To me if you are exempt from (A) and (B) you have met the requirements.  If there is any doubt about this the IRS needs to tell us ASAP since these LTP rules are effective 1/1/2024.  

Just so everyone understands the implication of CB Zeller's conclusion, this new rule is practically worthless for safe harbor MATCH plans trying to avail themselves of the exemption:

That's because if you have immediate eligibility for 401k and a 1 year wait for the match, now anyone with more than a year has to get the 3% top-heavy minimum.  No one in their right mind would do this.  IF they would they would just have the 3% nonelective.

Not a single solitary top-heavy safe harbor match plan will amend to liberalize 401k eligibility if relief does not apply. Not sure what the point was. 

If enacted, the SECURE 2.0 Act of 2022 division of the Consolidated Appropriations Act, 2023 amends also Internal Revenue Code of 1986 § 401(k)(15)(B) and § 416(g)(4)(H).

I.R.C. § 401(k)

(15) Special rules for participation requirement for long-term, part-time workers

For purposes of paragraph (2)(D)(ii)—

(B)  Nondiscrimination and top-heavy rules not to apply

(i)    Nondiscrimination rules

In the case of employees who are eligible to participate in the arrangement solely by reason of paragraph (2)(D)(ii), or by reason of such paragraph and section 202(c)(1)(B) of the Employee Retirement Income Security Act of 1974—

(I)   notwithstanding subsection (a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement, and

(II)  an employer may elect to exclude such employees from the application of subsection (a)(4), paragraphs (3), (12), and (13), paragraphs (2), (11), and (12) of subsection (m), and section 410(b).

(ii)   Top-heavy rules

An employer may elect to exclude all employees who are eligible to participate in a plan maintained by the employer solely by reason of paragraph (2)(D)(ii) from the application of the vesting and benefit requirements under subsections (b) and (c) of section 416.

(iii)  Vesting

For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the plan, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting “at least 500 hours of service” for “more than 500 hours of service” in subparagraph (A) thereof.

(iv)  Employees who become full-time employees

This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of paragraph (2)(D) without regard to paragraph (2)(D)(ii).

I.R.C. § 416(g)(4)(H):

(g)   Top-heavy plan defined

For purposes of this section—

(4)   Other special rules

For purposes of this subsection—

(H)  Cash or deferred arrangements or plans using alternative methods of meeting nondiscrimination requirements

The term “top-heavy plan” shall not include a plan which consists solely of-

(i)    a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13) and matching contributions with respect to which the requirements of paragraph (11), (12), or (13) of section 401(m) are met, or

(ii)   a starter 401(k) deferral-only arrangement described in section 401(k)(16)(B) or a safe harbor deferral-only plan described in section 403(b)(16).

Such term shall not include a plan solely because such plan does not include nonelective or matching contributions to employees described in section 401(k)(15)(B)(i). If, but for this subparagraph, a plan would be treated as a top-heavy plan because it is a member of an aggregation group which is a top-heavy group, contributions under the plan may be taken into account in determining whether any other plan in the group meets the requirements of subsection (c)(2).

3 hours ago, austin3515 said:

Congress intended to allow plan sponsors of small top-heavy plans to allow their hardworking employees to contribute from their date of hire.  If the IRS does not bear this in mind when analyzing this language it would be most unfortunate working Americans.  To me if you are exempt from (A) and (B) you have met the requirements.  If there is any doubt about this the IRS needs to tell us ASAP since these LTP rules are effective 1/1/2024.  

Just so everyone understands the implication of CB Zeller's conclusion, this new rule is practically worthless for safe harbor MATCH plans trying to avail themselves of the exemption:

That's because if you have immediate eligibility for 401k and a 1 year wait for the match, now anyone with more than a year has to get the 3% top-heavy minimum.  No one in their right mind would do this.  IF they would they would just have the 3% nonelective.

Not a single solitary top-heavy safe harbor match plan will amend to liberalize 401k eligibility if relief does not apply. Not sure what the point was. 

I didn't mean to appear to be concluding anything - merely pointing out a possible interpretation.

I agree that Congressional intent seems to have been as you describe. However I am not sure that the language in the Act accomplishes that intent, given the IRS's prior interpretation. We will have to wait and see.

And I’m just furnishing Congress’s revised texts.

I have only a general awareness about how § 416 might affect a small-business employer’s retirement plan. Despite 38+ years’ experience with many kinds of retirement plans (including advising recordkeepers about services for small-business employers), I’ve never myself analyzed any application of § 416.

Looking forward to confirmation that this will be a real thing and not a teaser!!

23 minutes ago, C. B. Zeller said:

However I am not sure that the language in the Act accomplishes that intent, given the IRS's prior interpretation.

Can you explain why you think the language in Act may not accomplish what you agree appear to be the congressional intent?  Is it the actual language or the IRS prior interpretation?

15 minutes ago, RatherBeGolfing said:

Can you explain why you think the language in Act may not accomplish what you agree appear to be the congressional intent?  Is it the actual language or the IRS prior interpretation?

It's the IRS interpretation. In RR 2004-13, they said

Quote

Unless a plan (within the meaning of § 414(l)) meets the requirements of § 416(g)(4)(H), no portion of the plan will satisfy § 416(g)(4)(H).

If that interpretation still stands, then a plan which has different eligibility for deferrals and safe harbor match would not satisfy 416(g)(4)(H).

There are 3 sections of SECURE 2.0 that affected sec. 416 and I don't think any of them would require the IRS to change this interpretation.

SECURE 2.0 sec. 310 amends sec. 416(c)(2) to say that employees who have not satisfied the minimum age and service requirements of sec. 410(a) do not have to be considered when determining if the plan satisfies the top heavy minimum. That's great, but it does not help with respect to employees who have satisfied minimum age and service but who otherwise are not getting a top heavy minimum under the safe harbor match plan (maybe because they did not make any deferrals).

SECURE 2.0 sec. 121 amends 416(g)(4)(H) to state that "starter" 401(k) plans are not considered top heavy. Not relevant here.

SECURE 2.0 sec. 125 amends 416(g)(4)(H) to state that a plan shall not be considered a top heavy plan "solely because such plan does not provide nonelective or matching contributions to [long-term part-time employees]." Again, not relevant here since the concern is with employees who have satisfied the minimum age and service requirements. This does help in the case of a plan that normally applies age 21/1 year of service eligibility for deferrals and safe harbor match, but now has to allow LTPT employees to participate for deferrals. However, for a plan that allows immediate entry for deferrals but has a 1 year of service requirement for match, it would not fall under this exception since it does not "solely" not provide a match to the LTPT employees.

Again, I hope I am wrong and the IRS comes down with a favorable interpretation.

I had not really followed this provision, but having reviewed the above and reviewed the statutory language, I agree with C.B. Zeller, except I don't think there's as much wiggle room as he holds out hope for.

Rev. Rul. 2004-13 says that if you let folks in early in your safe harbor plan, but don't give them the safe harbor contribution, that may be OK for 401(k) and (m) (because you can disaggregate under 1.401(k)-3(h)(3) and ADP/ACP test the early includeds), but goes on to say that this means your real plan (i.e., the single plan you have before you notionally disaggregate for testing) is not really exclusively safe harbor, so if your plan is, but for 416(g)(4)(H), top-heavy, and you let in some folks early and take advantage of 1.401(k)-3(h)(3) to not give those folks the safe harbor contribution you're making for the rest of the participants, then it's still top-heavy.

416(c)(2) as amended by Secure 2.0 Section 310 is telling you that if you are top-heavy for any reason (just garden variety top-heavy or top-heavy because you are a partly safe harbor 401(k) that falls out of 416(g)(4)(H) on account of Situation 4 of Rev. Rul. 2004-13, i.e., you're disaggregating under 1.401(k)-3(h)(3)), you don't have to give the early includeds the safe harbor minimum. I don't think it says anything about not losing 416(g)(4)(H) protection if you include some folks early.

I think the Groom summary, which at least for Section 310 just follows the Senate Finance Committee summary nearly verbatim, mischaracterizes the effect of the statutory language. Moreover, if what Congress intended is what the Senate Finance Committee implies is the effect of the provision, I think the statutory language is too great a miss for IRS to get there through an interpretation. Would need a technical correction.

Are we on the same page that a top-heavy Safe Harbor Match Plan would not amend their eligiblity to make it more generous because even though there is no top-heavy minimum due for people with less than a year, there is for people with more than a year?

Smaller Safe Harbor Match plans are generally top-heavy.  Why? The reason they are safe harbor match in the first place is because the owners participate and the employees do not.  So top-heavy comes at these plans pretty PDQ.  This would be a ridiculous oversight making this relief probably 1/3 as impactful as it otherwise might have been.  Maybe less. 

11 hours ago, Luke Bailey said:

I think the Groom summary, which at least for Section 310 just follows the Senate Finance Committee summary nearly verbatim, mischaracterizes the effect of the statutory language. Moreover, if what Congress intended is what the Senate Finance Committee implies is the effect of the provision, I think the statutory language is too great a miss for IRS to get there through an interpretation. Would need a technical correction.

I agree, the summary says separate top heavy testing, while the language in the language in the act simply says that otherwise excludable employees may be excluded while determining if 416(c)(2) has been satisfied.  

416(c)(2)(A) says that you meet the requirements for a TH plan if each participant who is a non-key gets an employer contribution of not less than 3%

416(c)(2)(B)says that the percentage in (A) for any year shall not exceed the percentage of contributions made to the key employee with highest percentage for the year.

The language in the act is pretty clear, if you are subject to TH minimum contributions, you don't have to give it to otherwise excludable employees.  Nothing in the act discusses separate TH testing.

I also think that the industry (practitioners and regulators) does a poor job of explaining these rules and the exceptions to participants.  This is often due to paraphrasing very technical language into something more understandable by to the average participant.  Even the IRS website has language like "There's no need to do top-heavy testing for a safe harbor 401(k) that receives only elective deferrals and safe harbor minimum contributions."   I think we need to draw a very distinct line between top heavy testing (is the plan TH or not) and meeting the required minimum if you are TH.

Austin, I agree with your analysis. Section 310 isn't effective until 2024, so that gives some time for IRS to elaborate on how they intend to interpret it, or for Congress to pass a technical correction.

2 minutes ago, RatherBeGolfing said:

I think we need to draw a very distinct line between top heavy testing (is the plan TH or not) and meeting the required minimum if you are TH.

I agree with this wholeheartedly. I try to avoid using the term "top heavy test" for this very reason. I prefer "top heavy determination" or "satisfying the top heavy minimum" depending which piece is being discussed.

1 hour ago, austin3515 said:

Are we on the same page that a top-heavy Safe Harbor Match Plan would not amend their eligiblity to make it more generous because even though there is no top-heavy minimum due for people with less than a year, there is for people with more than a year?

We are on the same page.

1 hour ago, austin3515 said:

Smaller Safe Harbor Match plans are generally top-heavy.  Why? The reason they are safe harbor match in the first place is because the owners participate and the employees do not.  So top-heavy comes at these plans pretty PDQ.  This would be a ridiculous oversight making this relief probably 1/3 as impactful as it otherwise might have been.  Maybe less. 

Isn't this sort of the point though? If you design your plan a certain way to minimize the expense of employer contributions to the staff and the key employees sit on most of the assets, you have to provide a minimum to the non-key.

4 minutes ago, C. B. Zeller said:

I prefer "top heavy determination" or "satisfying the top heavy minimum" depending which piece is being discussed.

I do as well.  Especially when you need to explain when it was determined and who has to get a contribution.

29 minutes ago, RatherBeGolfing said:

sn't this sort of the point though? If you design your plan a certain way to minimize the expense of employer contributions to the staff and the key employees sit on most of the assets, you have to provide a minimum to the non-key.

I thought the point of the recently law change was to faciliate people being able to contribute earlier.  You want that to happen, you can't penalize employers for doing it.

And I rather think the consequence (perhaps not the intention) is to disadvantage employers who are smaller and who happen to employ lower paid people. The assumption baked in to this rule is that CPA firms are "good" employers because they pay their average employee $85K (making up numbers) while the average Fast Food Joint pays $15 an hour (the former of course is rarely top-heavy because the contribution levels among the non-owners is generally substantial).  The owner of Fast Food Joint that sponsors a top-heavy SH Match plan requires punishment for being "Bad".  The real irony of course is that if they try to good a thing by allowing their own contributions from date of hire, they get punished.  That is just bazaar to me. Really bazaar.

Perhaps we can move this discussion to a next frame, about what one does in real-world practice.

Assume there might be ambiguity about what the statute provides. Assume no correction is enacted. Assume there is no further Treasury department or Internal Revenue Service interpretation.

Imagine 2024 ends, and an employer (one that serves also as its retirement plan’s administrator and trustee) must decide what the plan provides for some set of non-key employees.

Could one interpret tax law to allow the more employer-friendly position?

Imagine you have a professional responsibility for the employer’s tax return that involves the issue of whether the plan is a § 401(a)-qualified plan.

Could you find the more employer-friendly position has at least a “realistic possibility of success” such that it’s not professionally improper for you to sign the tax return (with sufficient disclosure) or advise the tax-return position?

Could you find the more employer-friendly position is supported by “substantial authority” such that the employer may take the tax-return positions without disclosure?

If you have no responsibility regarding any tax return, do you render your advice as if you had such a responsibility?

If you think about whether a tax-return position is good enough, consider:

“There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.” 26 C.F.R. § 1.6662 4(d)(3)(ii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR1d0453abf9d86e0/section-1.6662-4#p-1.6662-4(d)(3)(ii).

And authorities one may consider include “congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers[.]” 26 C.F.R. § 1.6662 4(d)(3)(iii) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR1d0453abf9d86e0/section-1.6662-4#p-1.6662-4(d)(3)(iii).

Or, as I suspect austin3515 might tell us, is spending time on such an interpretation beyond the customary practice of a retirement-plans TPA?

If so, does that mean a TPA’s client gets services grounded on conservative interpretations?

42 minutes ago, austin3515 said:

I thought the point of the recently law change was to faciliate people being able to contribute earlier.  You want that to happen, you can't penalize employers for doing it.

I don't disagree with you, but I think this was a step they weren't willing to take to achieve it said goal.  

I'm also not sure that extending TH exemption this way would necessarily achieve the other policy objectives.  It would allow employers to let some people defer earlier without having to contribute to them.  But would it lead to increased savings overall?  Would the hypothetical increase in deferrals be more than the required employer contributions for plans that would not have to contribute TH minimum? I doubt it.  

Wild speculation:  We have mandatory autoenrollment in this bill.  It didn't go as far as other proposals which mandated a plan or payroll deduction IRA for all employers of a certain size.  I don't think that will last long, the mandate will be back, and many employers will not have the ability to say "if I cant do this, I wont offer a plan at all".

2 hours ago, Peter Gulia said:

Could one interpret tax law to allow the more employer-friendly position?

I vote no on that, Peter. I also vote thumbs down on the possibility of a technical correction in the upcoming Congress. Even the most well-connected lobbyists are going to come a cropper on the incoming crew. Maybe in 2025, retroactive to 2024. But it's really not even a technical correction. They have fixed the 416(c) problem that, generally, letting in folks early increases your top-heavy contribution. Fine. Fixing the problem that 416(g)(4)(H) can be interpreted as not applying where early includeds are tested separately in a safe harbor k-plan such that, arguably, the "plan" no longer consists solely of safe harbor contributions would require a change to the 401(k) safe harbor provisions of the Code, or to 416(g)(4).

2 hours ago, Peter Gulia said:

Imagine you have a professional responsibility for the employer’s tax return that involves the issue of whether the plan is a § 401(a)-qualified plan.

Peter, the problem with going down the substantial authority path is that it's not just the employer's tax return. It's the plan's qualification, which means the plan's tax exemption, the employees' 1040's, and the employees' rollovers. If all we had to worry about was substantial authority and the employer's return, the world would be very different.

Luke, thank you for your observation (which I suspect likely reflects the mainstream).

If interpreting what a plan provides were my decision, I might carefully consider all the persons and interests you mention, perhaps even more carefully than other plan fiduciaries consider them.

But my discussion question asks about what an employer (one that serves also as its retirement plan’s administrator) might do, and about whether a professional might support an interpretation as reasonable enough that it’s a possible, and perhaps plausible, interpretation.

Does anything restrict a professional from writing a memo that analyzes all possible interpretations of what the plan’s governing documents provide for the non-key employees, describing strengths and weaknesses of each interpretation, and describing whether each interpretation has or lacks substantial authority?

And after reading such a memo, could the employer/administrator, using its plan-granted discretion to interpret the plan, choose one of the possible interpretations?

I’m mindful about how bad it is that an employer, as a fiduciary, decides a question that affects the employer’s personal interest. But ERISA § 408(c)(3) sets up that conflict.

I recognize the questions I asked might be a fanciful hypothetical. Among many reasons, employers that face top-heavy issues might not engage a professional’s time for the analysis.

I know some clients prefer that the professional resolve an ambiguity. But not every client thinks that way. And not every professional wants responsibility to make one’s client’s decision.