Mleech Posted February 11 Posted February 11 I'm doing testing right now and a plan of ours fails the top-heavy test. Normally, my understanding is that the correction is a 3% employer contribution to all employees eligible for salary deferrals. However, I've run into an interesting scenario: This plan is not a safe harbor plan, and they don't allow salary deferrals at all under the plan document, it's only profit sharing, with eligibility of 1 year and 21. It's pro-rata. Essentially, everyone who is eligible for for profit sharing (and therefore the plan as a whole technically) has gotten a 3% employer contribution. Do they need to make a corrective 3% contribution to the employees not eligible for profit sharing?
Popular Post C. B. Zeller Posted February 11 Popular Post Posted February 11 1 hour ago, Mleech said: I'm doing testing right now and a plan of ours fails the top-heavy test. This is a pet peeve of mine, you can't "fail" the top heavy determination (aka top heavy test). You are just top heavy or not top heavy. In this case you're top heavy. Not a failure. 1 hour ago, Mleech said: my understanding is that the correction is a 3% employer contribution to all employees eligible for salary deferrals. The actual rule is that in a top heavy DC plan, each participant who is a non-key employee must receive an employer allocation equal to at least 3% of their compensation, or a percentage equal to the highest percentage allocated to any key employee if it is less than 3%. This allocation may impose a last day rule, meaning employees who are terminated before the end of the plan year do not need to receive the top heavy minimum. The rule was modified by SECURE 2.0 so that employees with less than 1 year of service or who have not attained age 21 do not need to receive the top heavy minimum contribution. This is effective starting for 2024 plan years. Since your plan is profit sharing only with a pro rata allocation, you shouldn't normally have any issues with the top heavy minimum, as each non-key employee would receive the same percentage of employer contributions as each key employee. However a couple of things to watch out for: If the plan excludes any compensation for allocation purposes (for example, pre-entry compensation), that definition of compensation may not be used for the top heavy minimum allocation, even if it is a 414(s) safe harbor definition. The plan must use full year (415) compensation. If the profit sharing allocation has a service condition, for example, the employee must complete 1000 hours of service in the current year to be eligible for a contribution, then an additional top heavy minimum might be needed for participants who were active on the last day but did not complete the 1000 hours. 1 hour ago, Mleech said: Do they need to make a corrective 3% contribution to the employees not eligible for profit sharing? Employees who are not participants (have not met the plan's eligibility requirements) do not need to receive a contribution. Jakyasar, Mr Bagwell, Bruce1 and 5 others 8 Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance. Corey B. Zeller, MSEA, CPC, QPA, QKA Preferred Pension Planning Corp.corey@pppc.co
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