Required Aggregation for Top-Heavy

Employer sponsors two plans – one is a cross-tested profit sharing plan with a 1-year service requirement; the other plan is a 401(k) plan with immediate entry.  Each plan can pass coverage testing independently and the profit sharing plan can pass 401(a)(4) testing with and without including deferrals.

 The PS plan is top-heavy with key employees participating.  The 401(k) plan is not top-heavy since key employees do not make deferrals and do not have account balances in the plan; however the key employees are not specifically excluded from participation.

 Since the 401(k) plan does not specifically exclude key employees from participation must the plans be aggregated for top-heavy purposes thus requiring top-heavy / minimum gateway contributions for employees with less than one year of service?  If so, would amending the 401(k) plan to exclude keys employees from participation change the answer?

Yes. Yes. 

Mike is correct of course, but I will just add that the required aggregation group consists of all plans in which a key employee participated during the determination year or the previous four plan years - see 1.416-1 T-6. So if you exclude the key employees from the 401(k) starting in 2019, the first year that it would not have to be included in the top heavy aggregation group would be 2024.

Thank you both.

I realize that for purposes of 410(b) testing and 5500 mere eligibility to make deferrals under a K plan makes you a "participant." But is it clear that the same definition applies for purposes of 416(g)(2)(A)(I)?

416(c)(2)(A) states that every "participant" who is a non-key employee must receive a minimum contribution. I think the consensus (although I don't have a cite handy) is that in a 401(k) plan, non-key employees who satisfied the plan's minimum age and service requirements as of the end of the plan year, e.g. the 410 definition of participant, are entitled to the top heavy minimum as long as they are still employed at the end of the year, regardless of whether they contributed any elective deferrals. It seems reasonable to assume that the same definition of "participant" applies in 416(g) as in 416(c).

The regs are more clear that non-deferring participants are not excluded from the TH minimum.
 

Quote

 

1.416-1

M-10 Q. Which employees must receive the defined contribution minimum?

A. Those non-key employees who are participants in a top-heavy defined contribution plan who have not separated from service by the end of the plan year must receive the defined contribution minimum. Non-key employees who have become participants but who subsequently fail to complete 1,000 hours of service (or the equivalent) for an accrual computation period must receive the defined contribution minimum. A non-key employee may not fail to receive a defined contribution minimum because either (1) the employee is excluded from participation (or accrues no benefit) merely because the employee's compensation is less than a stated amount, or (2) the employee is excluded from participation (or accrues no benefit) merely because of a failure to make mandatory employee contributions or, in the case of a cash or deferred arrangement, elective contributions.

 

My point was different, I think. Of course if the plans are aggregated, all non-keys must get the top-heavy minimum. My issue was whether the K-plan had to be aggregated with the ps just because the two keys were not excluded from it, although they had not every contributed (or, dare I say it, "participated"). My question was whether it was clear under Section 416 and the top-heavy regs that the two keys "participated" in the K-plan if they were eligible but had never had a dime allocated under it.

Maybe I misunderstood the question.

The cite I posted above was in response to C.B.'s post.

Luke,  I agree the regs aren't as clear as they could be.  After some searching, I found the same "participates" language in 1.416-1, T-10 in plan language requirements for specifying which non-key employees receive the TH minimum.   When you put this together with M-10, I think it means that not deferring doesn't make a non-key fail to "participate".   The same should apply to a key employee. 
 

Quote

 

T-10 Q. If a required aggregation group is top-heavy, and one plan of the group satisfies the requirements of sections 416 (b), (c), and (d), may other plans in the group include provisions which do not satisfy sections 416 (b), (c) and (d)?

A. No. Each plan in a required aggregation group is top-heavy if the group is top-heavy. Thus, each plan must contain provisions satisfying the requirements of sections 416 (b) and (d). If all the plans are defined contribution plans, only one plan need satisfy the requirements of section 416(c)(2) with respect to any non-key employee who participates in more than one of the plans. If all the plans are defined benefit plans, only one plan need satisfy the requirements of section 416(c)(1) with respect to any non-key employee who participates in more than one of the plans. However, in the case of non-key employees who do not participate in more than one plan, each plan must separately provide the applicable minimum contribution or benefit with respect to each such employee. See Question and Answer M-12 in the case of employees who are covered under both a defined benefit and a defined contribution plan.

 

The Internal Revenue Manual uses different wording:

Kevin, I had seen same language and still don't think it nails down what it means to "participate" for purposes of required aggregation. I am not disagreeing with you either, and my bet would be that IRS would agree with your conclusion, less clear what a court would say, although I would not want to take it on a contingency. My point was that the consequences of an inadvertent RAG could be so harsh, depending on financial facts, that the employer might want to know all of its options. May not be a question of what is likely the "right" answer, but rather what is defensible and weighing risks.

It wasn't my intention to take the discussion off the rails. My point was just that another paragraph of 416 clearly uses the term "participant" to include "person who is eligible regardless of whether they choose to defer" so it seems like a stretch to claim that the same term could mean something else in the same section of code.

Yeah. Well, anyway, KCA seems to have been quickly satisfied with the answer that the plans had to be aggregated, so maybe not much money involved.

Interesting argument based on careful semantic parsing of terms. Thanks, Ace. Would be interesting to know what KCA ended up doing.

I think it sucks. I'm away otherwise I would say more. 

1.416 T-10, as Kevin pointed out, raises an interesting scenario. Consider an employee who is eligible for a 401(k) plan and a separate profit sharing plan which are part of the same required aggregation group. The reg states that "In the case of non-key employees who do not participate in more than one plan, each plan must separately provide the applicable minimum contribution or benefit with respect to each such employee." If you take "participate" to mean "contribute" then would an employee who does not contribute have to receive the top heavy minimum in both plans?

Anecdotal, but as always a reminder to check your plan document: I have a document which defines Required Aggregation Group as "each plan of the Employer in which a Key Employee is a participant in the Plan Year containing the "determination date" or any of the four preceding Plan Years (regardless of whether the plan has terminated), and each other plan of the Employer which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410." In this case I think it's clear that the use of the term "participant" means that anyone eligible in the past 4 years would be included, regardless of how you interpret the word "participates" in the regs.

Well, you asked.  I disagree with Luke in the sense that ACE's argument is based on not an interesting argument but a tortuous argument meant to confuse the meaning of "participates" (as defined under 410) and "contributes" as defined under 402(g) (and other sections).  A long description that is ultimately based on a fundamental mis-reading and mis-interpreting is not "interesting" to me.  At all.  And your invitation to the OP to adopt your interpretation followed by your further invitation to be kept informed smacks of intentionally encouraging a course of action that is much more than likely to fail and then waiting around for the horrific result just for kicks.  In other words, everything about your interpretation, in my view, sucks.

Looks like ACE has deleted all of his posts.  For those trying to make sense of this thread he/she made a circuitous argument that invited the OP to require a deferral from a key employee before a plan would join a required aggregation group.  About the nicest thing I can say about that would be that it is an aggressive interpretation. He/she then invited the OP to adopt that interpretation and to report back on the negative consequences, if any.  Finally, he/she asked for what people thought of his/her line of reasoning.  I told him/her.  I may have a detail or two wrong, but since the posts have been deleted, memory is all I have to go on.