Owner-Only Plan & Top Heavy

Plan is owner and spouse only.  They have 100% of assets (obviously). Is the plan top heavy?  I know this question sounds dumb, but I thought maybe top heavy was an ERISA requirement to which they are EXEMPT, but I don't see owner-only plans listed as a plan type not subject to top heavy.   I also considered that there would be no non-key employee balances giving us a denominator in our top heavy ratio of 0, making the plan not top heavy.  But I can't find what I thought would be an easy answer!

Here is why I ask - the plan was NOT written to exclude keys from the top heavy minimum and both the owner and spouse deferred the max, but they were not wanting to do an ER contribution.  Do they have to put in a top heavy contribution for themselves?

Thanks!

Yes the Plan is top-heavy at 100%.

Since you have no non-key ees I don't believe you have any required contribution but you can check with your document provider if it's a concern.

Thanks, Lou.  I was not thinking clearly on that part of the question.  The document is pretty clear, so as long as no exemption to top heavy rules applies for plans not subject to ERISA, I guess they have to do it.  I would like to retroactively amend to exclude keys from the top heavy under loosened SCP rules for Eligible Inadvertent Failures but it reduces their benefit so I think this is not an option.   Is it permissible to retroactively amend (back to 1/1/2022) to reduce a benefit if it is only impacting key employees?

Take a look at the IRS "401(k) Plan Fix-It Guide - The plan was top-heavy and required minimum contributions were not made to the plan."

It suggests that the correction for a failure to make a top-heavy contribution for a plan year is to make the top-heavy contribution to non-key employees.

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-was-top-heavy-and-required-minimum-contributions-were-not-made-to-the-plan

I would not lose sleep over a plan with no non-key employees that did not make an employer contribution.

If the contribution is that onerous, though, they could always reduce their 2023 deferrals so that the business can afford it before 12/31/23.

Does the plan have last day rule for top heavy, thinking out loud? Hours will not matter.

Totally agree with Lou, do not lose sleep unless there is a very specific language in the plan document that requires contributions.

My 2 cents.

Wow, what a bizarre set of circumstances. Based on the info re provisions that you have provided, it seems to me that it would technically be a prohibited cutback if you don't make the "required" contribution to these key employees. The IRS fix-it program explanation, while very helpful in general, clearly does not contemplate this highly unusual situation.

So, IMHO, you would have an operational violation of the plan terms if this contribution is not made, and I don't believe compounding it with a prohibited cutback is a wise course of action. Bit the bullet and make the contribution. You could file under VCP, and perhaps the IRS would approve it, but the time and expense may not be worth it, particularly if it is rejected by the IRS.

If it is a cash flow issue, perhaps they could take a loan to make the contribution, and then as Bri suggests, cut back their deferrals to repay the loan. If the loan is repaid fairly quickly, the interest cost will be small.

Section 411(d)(6) prohibits cutbacks of "accrued benefits".  Section 411(a)(7)(A)(ii) defines "accrued benefit" in a defined contribution plan as the participant's account balance. A contribution that hasn't been made isn't part of the account balance, so not making it isn't a prohibited cutback.

Furthermore, elective contributions are employer contributions.  Treas. Reg. §1.401(k)-1(a)(4)(ii) and (f)(4)(i).  It is only a special rule that excludes them from being counted toward satisfying the obligation to make top-heavy minimum contributions.  Treas. Reg. §1.416-2, Q&A M-20.  It follows that elective contributions for key employees may satisfy a plan-imposed obligation to make employer contributions for their benefit.

In short, there's nothing wrong with the plan in form or operation, although it would be a good idea to amend it so as to avoid confusion in the future.

20 minutes ago, Tom Veal said:

A contribution that hasn't been made isn't part of the account balance, so not making it isn't a prohibited cutback.

A contribution that is required is...required. The fact that it has not yet been made does not make it fair game to not make it.

Assuming OP is accurate, what a stupid document.

3 hours ago, Bird said:

A contribution that is required is...required. The fact that it has not yet been made does not make it fair game to not make it.

But that doesn't mean that the failure to make it is a prohibited cutback.  The employer may have an obligation to make it that can be enforced by a plan fiduciary, but the participants in this instance obviously have no desire to be "protected" in that fashion.

In any event, for the reason that I pointed out, nothing that occurred was inconsistent with the terms of the plan, ill-thought-out though those terms might have been.

On 7/14/2023 at 5:46 PM, Tom Veal said:

But that doesn't mean that the failure to make it is a prohibited cutback.  The employer may have an obligation to make it that can be enforced by a plan fiduciary, but the participants in this instance obviously have no desire to be "protected" in that fashion.

In any event, for the reason that I pointed out, nothing that occurred was inconsistent with the terms of the plan, ill-thought-out though those terms might have been.

Does the desire to be protected have anything to do with it? Maybe we're arguing about angels on the head of a pin - I agree with those who wouldn't worry about it.