Top Heavy Test - Excluded HCE

We have a new plan with 2 participants. One of the participants is a 100% owner. The other one is an HCE. There have been no contributions funded to the plan so far.

The owner would like to fund at least 3% to herself. Would it be possible to exclude the non-owner HCE (by division, for example) and not have to fund the 3% Top Heavy Minimum to this participant? Or would the excluded HCE still be counted in the Top Heavy Test and therefore would have to receive the 3% minimum?

Thanks.

The non-key HCE would still need a TH contribution. 

no way out, NHCE gets 3% and HCE would get whatever % the testing would support.  To avoid the TH, you could had excluded HNCE from the Plan alltogether but then you would have a coverage issue.  Bottom line, the HNCE must get 3% if the PLan is TH.  But is it?

If it is a DC Plan you can exclude non-onwer HCEs by some classification. But they need to be excluded, not just not participating.  If it's a DB you'll fail 401(a)(26) if they are the only two.

If there are any non-keys in the Plan, they will need to get a required TH minimum if any key has a non-zero allocation rate and if there are and NHCE eligible, like the guy becomes a NHCE in the future but is still employed, you'd need to bring them in for coverage.

Vlad401k, could you please provide a little bit of additional information:

• Is the plan a 401(k) plan, and if yes, how much is each participant planning of deferring for the current plan year?
• Does the plan allow for a Non-elective Employer Contribution, and if so, what is the allocation formula?
• Is this the first plan year for the plan (or does "new plan" really mean a new client)?
• How long has the company been in business?
• Does the non-owner HCE have responsibilities and compensation that may make them a key employee?

All of the above taken together possibly could result in determining the plan is not Top Heavy.

For example, if this is the first plan year you will look to the end-of-year balances to determine in the plan is TH.   If the owner has a balance from at the end of the year from salary deferrals of $22,500 for the plan year and the non-owner has a balance of $15,610 from salary deferrals, then the plan is not TH (but there is not room for an additional contribution).  If the non-owner has a higher balance, this creates some room to a contribution to the owner (following the plan rules for NEC allocations.)

Based on the responses to the questions, there may be some room for some creativity.

On 12/4/2023 at 1:45 PM, Lou S. said:

If it's a DB you'll fail 401(a)(26) if they are the only two.

There are only two employees, so they would OK with a DB as far as 401(a)(26) is concerned.

"On each day of the plan year, a defined benefit plan must benefit the lesser of:

50 employees of the employer, or
 
the greater of:

40 percent of all employees of the employer, or
 
2 employees (or if there is only 1 employee, such employee)."
 

No, the DB won't be OK if you have 2 and excluded one of them, even if one of them is an HCE.

Agree with @Lou S.. When you have 2 people, the greater of (40% or 2) is 2.