Safe Harbor Mid-Year Suspension and Top Heavy

I am brooding over the interaction between the exemption from top heavy for safe harbor plans and a mid-year suspension of safe harbor contributions.   I am thinking about three issues.  For all three issues below, assume the plan would be top heavy but for the safe harbor exemption.  

Issue 1. 

The first is an old issue, but in re-reading Revenue Ruling 2004-13, I am having doubts now about Situation 4 in that ruling. 

Under Situation 4, the sponsor has a safe harbor match, but employees who at hire are eligible to make elective contributions have a 1 year of service requirement for the safe harbor match.

The IRS responds as follows: 

In Situation 4, under the plan, newly hired nonhighly compensated employees who make elective contributions will not be eligible to receive any matching contributions until they have completed 1 year of service. Since this will result in a greater rate of matching contributions for highly compensated employees than for nonhighly compensated employees, the matching contributions do not satisfy the requirements of § 401(k)(12) (or  § 401(m)(11)). Further, since all eligible nonhighly compensated employees under the plan do not receive safe harbor nonelective contributions or safe harbor matching contributions, the matching contributions made under the plan do not satisfy the requirements of § 401(k)(12). However, certain plans that provide for early participation may satisfy the requirements of § 401(k)(12) with respect to the portion of the plan that covers employees who have completed the minimum age and service requirements of § 410(a)(1), while satisfying the ADP test of § 401(k)(3)(A)(ii) for the eligible employees who have not completed the minimum age and service requirements. 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). (See Notice 2000-3, 2000-1 C.B. 413, Q&A-10.)

I added the bold. 

Is this saying everyone in the plan has to receive the top heavy contribution (minus any match), or just the otherwise excludible employees?  I thought for both 414(l) and top heavy purposes, the otherwise excludible employees were treated as one plan with the other participants.  But I also thought you only had to give the top heavy in this situation to otherwise excludible employees.  This is what has created my doubt.

Issue 2.  

What happens if the employer only makes safe harbor contributions during a year, but in the middle of that year suspends the SH contribution?  Up until the date of the suspension, the only contributions that were made were safe harbor contributions.  After the suspension, the plan is required to fall back on the ADP/ACP test.  Is it reasonable to take the position that the plan only received SH contributions for the year, and thus under 2004-13 the plan is still exempt from top heavy?  

I think the answer is no.  I think once the plan is amended mid-year to suspend the SH contribution, the contributions that were previously made are no longer considered SH contributions for purposes of the safe harbor exemption from top heavy status.  I could see, however, that one could argue that during the year the plan only received safe harbor contributions, and nothing else, and thus under 2004-13 the safe harbor exemption still applies.  I could also see an argument that the top heavy contribution is only required for compensation paid for the portion of the year the plan is no longer safe harbor.  Nonetheless, I think the best answer is that once the plan is amended mid-year to suspend the safe harbor, the plan is top heavy for the entire year.  

Issue 3.

We know that a plan that does not give the SH contribution to HCEs nonetheless qualifies as a SH plan (provided all other requirements are met).  In an ASPPA Q&A, the IRS said the HCEs who do not receive the safe harbor and who are not key employees are not eligible for the top heavy contribution.

What if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs?  Would the analysis here be different from the analysis in Issue 2?  

I think the answer here is yes, meaning the plan remains a safe harbor plan for purposes of the top heavy exemption even if the plan is amended mid-year to suspend the safe harbor contributions only for HCEs.  If the plan can give the HCEs nothing for the entire year and still be safe harbor, it should be able to give the HCEs a safe harbor contribution for part of the year and still be safe harbor.  

Your plan is either exempt from Top Heavy or it's not.  When making a determination as to whether the plan is meets the Safe Harbor ADP exception to Top Heavy, the written provisions are just as important.  You're not merely looking at the actual contributions that were made to the plan.  You're also looking at whether the arrangements under which they were made are written to meet the ADP/ACP safe harbors.  

I didn't read each of your points (short attention span ).  But, thought these thoughts may help.

Good Luck!

my understanding is #1, all get top heavy, though the safe harbor counts toward top heavy, so, at least in the case of a 3% SHNEC it doesn't make a bit of difference unless you have mid year entrants. (who would get part 100% vested and part subject to vesting.

2 hours ago, ETA Consulting LLC said:

Your plan is either exempt from Top Heavy or it's not.  When making a determination as to whether the plan is meets the Safe Harbor ADP exception to Top Heavy, the written provisions are just as important.  You're not merely looking at the actual contributions that were made to the plan.  You're also looking at whether the arrangements under which they were made are written to meet the ADP/ACP safe harbors.  

I didn't read each of your points (short attention span ).  But, thought these thoughts may help.

Good Luck!

Thank you for the response.  In order to suspend, the plan must already state that the plan provides the safe harbor.  To suspend, the plan must be amended to eliminate the safe harbor and apply the ADP/ACP (among other things).  

Quote

 

416(g)(4)(H) Cash or deferred arrangements 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

(ii) matching contributions with respect to which the requirements of section 401(m)(11) or 401(m)(12) are met.

 

Quote

 

1.401(k)-3(e) Plan year requirement—(1) General rule. Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. ...

 

Put them together and stopping the safe harbor contribution mid-year makes you lose the top heavy exemption, since you do not satisfy 401(k)(12) or 401(k)(13) for that plan year.

For your last point, a reduction or suspension of the safe harbor contribution mid-year puts you under the rules of 1.401(k)-3(g). I don't see an exception if you are reducing only HCE safe harbor contributions. 

55 minutes ago, Kevin C said:

 

Put them together and stopping the safe harbor contribution mid-year makes you lose the top heavy exemption, since you do not satisfy 401(k)(12) or 401(k)(13) for that plan year.

For your last point, a reduction or suspension of the safe harbor contribution mid-year puts you under the rules of 1.401(k)-3(f). I don't see an exception if you are reducing only HCE safe harbor contributions. 

I agree with you that the plan loses top heavy exemption unless it is a safe harbor for the entire plan year.  I don't agree that the reduction or suspension puts the plan under the rules of 1.401(k)-3(f).  Rather, I think it falls under 1.401(k)-3(g).  

Oops.  I'll fix the typo.

14 hours ago, Kevin C said:

Oops.  I'll fix the typo.

Even if it is a typo, I'm not sure an exception is needed.  1.401(k)-3(g) allows the sponsor to reduce safe harbor contributions.  It doesn't say the reduction must apply to all participants.   This gets back to my original thought.  If the sponsor can give the non-key HCEs no safe harbor, why can't it  give them a partial safe harbor for the year and then suspend the SH contributions for the non-key participants mid-year?  It doesn't make sense that the sponsor can give them nothing, but if it gives them something, the top heavy kicks in.   The other side of the argument though is if the sponsor starts with what is intended to be a SH contribution and then stops, what it gave them was not safe harbor and thus the top heavy kicks in, because the plan for that year did not consist solely of safe harbor contributions.  

The regs aren't always logical, but we still have to follow them if we want our clients' plans to remain qualified. In this case, the regs make you follow the same rules to reduce a SH contribution mid-year as you would for a complete suspension of the SH mid-year.  That may not always seem fair, but that's how the rules work.   

I tell clients that going SH is buying your way out of the discrimination testing on deferrals and match.  The price you pay is the SH contribution and following the SH regs.  And, yes, it can be painful to exit the SH mid-year.

Of course we have to follow the regs, but what do the regs say?  The regulations merely say you can reduce or suspend safe harbor contributions.  The regulations also say you are not required to give safe harbor contributions to HCEs.  You can have a safe harbor plan without giving HCEs any safe harbor contributions.  I don't see any thing that says giving HCEs a portion of the safe harbor causes the plan to lose safe harbor status.    

2 hours ago, ERISAAPPLE said:

This gets back to my original thought.  If the sponsor can give the non-key HCEs no safe harbor, why can't it  give them a partial safe harbor for the year and then suspend the SH contributions for the non-key participants mid-year?  It doesn't make sense that the sponsor can give them nothing, but if it gives them something, the top heavy kicks in.   The other side of the argument though is if the sponsor starts with what is intended to be a SH contribution and then stops, what it gave them was not safe harbor and thus the top heavy kicks in, because the plan for that year did not consist solely of safe harbor contributions

I'm a little confused, but trying to think through this with you....

Plan is Top Heavy, Plan excludes HCE from getting the SH: if the plan was not SH, then all Non-Key would be required to get the TH provided a Key employee received/deferred (we will say the Key deferred above 3% for ease) a contribution.  But because the plan is SH, the exemption kicks in and no TH is required.  I'm with you here.

You now throw into the mix a mid-year suspension and Non-Key HCE employees and the quote above.  Seems to me that the removal of the SH contribution is going to require some sort of contribution to the Non-Keys (including Non-Key HCE) to satisfy the Top Heavy requirement.  (Like Tom said above)  Giving the Non-Key HCE a contribution doesn't "kick in the top heavy", they were required a contribution because they are Non-Key.  The other side of the argument is that all the employees are owed a TH contribution because the SH was removed mid-year.

Current year contributions don't turn on the TH.  Last year's TH calculation turns on the TH analysis.

Hope that helps.

Good analysis Mr. Bagwell.  I keep going back to the IRS ASPPA Q&A (mentioned in the EOB) where the IRS said no top-heavy contribution is required for HCEs who are not key employees and who do not receive a SH contribution.  Based on that Q&A, if the plan is SH plan for the entire year, but with zero contributions for the HCEs, the SH top-heavy exemption applies.  The analysis seems to be that a plan can be safe harbor even if HCEs don't receive the SH contribution.  It doesn't make sense to me that if the plan gives the non-key HCEs zero in contributions, no top heavy contribution is required, but if plan gives the non-key HCEs more than zero, and also gives the NHCEs a SH contribution for the whole year, then the non-key HCEs (and all NHCEs) must be given the top heavy contribution.    Nonetheless, under Revenue Ruling 2004-13, I can see an argument that the "more than zero" contribution for the HCEs was not in fact a SH contribution (due to the mid-year suspension), and thus for the year the plan's contributions do not consist solely of SH contributions.  I think that unless we get guidance otherwise, that is the more cautious position to take.  

I'm still in few knots here...

Good analysis Mr. Bagwell.  I keep going back to the IRS ASPPA Q&A (mentioned in the EOB) where the IRS said no top-heavy contribution is required for HCEs who are not key employees and who do not receive a SH contribution.  Based on that Q&A, if the plan is SH plan for the entire year, but with zero contributions for the HCEs, the SH top-heavy exemption applies.  The analysis seems to be that a plan can be safe harbor even if HCEs don't receive the SH contribution. 

ME:  It's not "seems to be".  The regs state you can elect to not give the HCEs safe harbor contributions.  The plan document we use has the option to whom the SH contribution applies.  All, NHCE, NHCEs and designated HCEs.  You can be safe harbor and exclude the HCEs.  This is advantageous in SHNEC, Cross tested plans when owner and children employees are involved.....

It doesn't make sense to me that if the plan gives the non-key HCEs zero in contributions, no top heavy contribution is required, but if plan gives the non-key HCEs more than zero, and also gives the NHCEs a SH contribution for the whole year, then the non-key HCEs (and all NHCEs) must be given the top heavy contribution.   

ME:  The above paragraph is where you lose me.  A safe harbor plan design will let you exclude the HCEs and be compliant with safe harbor rules.  What kind of contribution are you talking about when you say "but if plan gives the non-key HCEs more than zero"?  Why would the non-Key HCEs be getting a contribution after the suspension?  Are you talking deferrals?  

Nonetheless, under Revenue Ruling 2004-13, I can see an argument that the "more than zero" contribution for the HCEs was not in fact a SH contribution (due to the mid-year suspension), and thus for the year the plan's contributions do not consist solely of SH contributions.  I think that unless we get guidance otherwise, that is the more cautious position to take.

ME: "Solely" contributions that satisfy safe harbor rules are deferrals and safe harbors.  Not safe harbor contributions only.

ME: Of course the ADP/ACT test kick in for the whole year after suspension.  And you lose the TH exemption, unless the KEYs don't defer or receive contributions.

4 hours ago, ERISAAPPLE said:

Of course we have to follow the regs, but what do the regs say?  The regulations merely say you can reduce or suspend safe harbor contributions.  The regulations also say you are not required to give safe harbor contributions to HCEs.  You can have a safe harbor plan without giving HCEs any safe harbor contributions.  I don't see any thing that says giving HCEs a portion of the safe harbor causes the plan to lose safe harbor status.    

The regs also say that if the safe harbor provisions do not remain in effect for the entire plan year, the plan does not satisfy 401(k)(12) or 401(k)(13), which means it is not SH.  See 1.401(k)-3(e)(1) above.   It isn't whether or not the HCEs get the SH contribution that determines if you lose SH status.  Reducing the SH contribution mid-year causes you to lose SH status and the TH exemption.  If the TH exemption is important to them, then change the SH provisions for next year.

We've been cussing and discussing the mid-year amendment rules in the SH regs since they came into effect. What you could have done at the beginning of the year is irrelevant.  When you try to amend mid-year, the rules are different. 

1 hour ago, Mr Bagwell said:

ME:  The above paragraph is where you lose me.  A safe harbor plan design will let you exclude the HCEs and be compliant with safe harbor rules.  What kind of contribution are you talking about when you say "but if plan gives the non-key HCEs more than zero"?  Why would the non-Key HCEs be getting a contribution after the suspension?  Are you talking deferrals?  

Consider this.  Assume the sponsor amends the plan mid-year to suspend all SH contributions for everyone.  I believe (though I admit I could be wrong) if the sponsor does that, the IRS would say the plan is not safe harbor for the year and the top-heavy rules apply for that year.  See Kevin C's reference to the requirement to provide the safe harbor the entire year, pursuant to 1.401(k)-3(e).  Up until the suspension, the plan has received nothing but SH contributions (or at least assume that it has).  My thinking is that the plan amendment retroactively causes the contributions that were intended to be SH contributions not to be SH contributions, and thus for that year the plan's contributions are not solely SH contributions.  Since the contributions were not "solely" SH contributions, the top heavy rules apply.    

We can carry that same analysis of retroactively recharacterizing the contributions to a situation where the SH is suspended only for the HCEs.  In that case, since the HCEs did not get a SH contribution for the entire year, those contributions could be recharacterized retroactively as not being SH contributions. 

That said, I personally believe an argument can be made that suspending the safe harbor mid-year for HCEs only does not cause the plan to lose its exemption from top heavy.  I do feel, however, that the more cautious approach, if the plan would in fact be top heavy, is not to suspend the SH contributions for the HCEs only in the absence of some clear guidance.  

Again, I don't know the answer, which I guess is why I am asking the question.  

Ok.  I think I'm following you now.

I take it the employer is trying to not pay some safe harbor dollars?  And you are trying to be creative by suggesting to just remove the safe harbor piece for the HCEs with a mid-year amendment. 

Hmmm..... will that really save that much?  And now to subject the HCEs to a potential refund if SH status is revoked.  Only to come back around to a TH for the Non-Key if SH status is revoked.

Seems to me that keeping the plan as is for 2018 is the better play.  I don't know the answer to your question.  Maybe someone else will comment about stripping only the safe harbor contribution for the HCEs will work.

20 hours ago, Kevin C said:

The regs also say that if the safe harbor provisions do not remain in effect for the entire plan year, the plan does not satisfy 401(k)(12) or 401(k)(13), which means it is not SH.  See 1.401(k)-3(e)(1) above.   It isn't whether or not the HCEs get the SH contribution that determines if you lose SH status.  Reducing the SH contribution mid-year causes you to lose SH status and the TH exemption.  If the TH exemption is important to them, then change the SH provisions for next year.

We've been cussing and discussing the mid-year amendment rules in the SH regs since they came into effect. What you could have done at the beginning of the year is irrelevant.  When you try to amend mid-year, the rules are different. 

20 hours ago, Kevin C said:

The regs also say that if the safe harbor provisions do not remain in effect for the entire plan year, the plan does not satisfy 401(k)(12) or 401(k)(13), which means it is not SH.  See 1.401(k)-3(e)(1) above.   It isn't whether or not the HCEs get the SH contribution that determines if you lose SH status.  Reducing the SH contribution mid-year causes you to lose SH status and the TH exemption.  If the TH exemption is important to them, then change the SH provisions for next year.

We've been cussing and discussing the mid-year amendment rules in the SH regs since they came into effect. What you could have done at the beginning of the year is irrelevant.  When you try to amend mid-year, the rules are different. 

That is the more cautious approach.