401K Top Heavy Testing

Hi, we are a small business with 4 people, all related to the owner. Since we do not have any employees considered “non highly compensated” under IRS rules, are we exempt from any sort of top heavy requirements? Thank you.

I think that it would ultimately depend on how you are related to the owner and if their ownership is attributed to the other three employees. It is possible to be HCE, but not Key in which case a Top Heavy Minimum allocation will have to be made to the non-Key employee(s).  

You have to determine whether or not they are "Key".

Good Luck!

10 minutes ago, 401_noob said:

I think that it would ultimately depend on how you are related to the owner and if their ownership is attributed to the other three employees. It is possible to be HCE, but not Key in which case a Top Heavy Minimum allocation will have to be made to the non-Key employee(s).  

 

Thank you for the reply. The company consists of husand, wife, and two children. The husband owns the company. Are all 4 considered key employees? The company is not matching contributions.

under the stock attribution rules of 318(a) children are deemed to own the stock of their parents (even if they are adopted children)

so based on what you  indicated, all employees are key employees

note: of course, the document is important!!!!! for instance if item (ii) was checked rather than (I) then top heavy is still due!

8.     Top-Heavy Allocations

Top-Heavy allocations are made to

a.     [ X ]  This Plan.  Participants who share in Top-Heavy minimum allocations:

i.      [ X ]  Non-Key only.  Any Participant who is employed by the Employer on the last day of the Plan Year and is not a Key Employee

ii.    [  ]  All Participants.  Any Participant who is employed by the Employer on the last day of the Plan Year

iii.   [  ]  Participants covered by a collective bargaining agreement will share in Top-Heavy minimum allocations provided retirement benefits were the subject of good faith bargaining.

30 minutes ago, Tom Poje said:

under the stock attribution rules of 318(a) children are deemed to own the stock of their parents (even if they are adopted children)

so based on what you  indicated, all employees are key employees

note: of course, the document is important!!!!! for instance if item (ii) was checked rather than (I) then top heavy is still due!

8.     Top-Heavy Allocations

Top-Heavy allocations are made to

a.     [ X ]  This Plan.  Participants who share in Top-Heavy minimum allocations:

i.      [ X ]  Non-Key only.  Any Participant who is employed by the Employer on the last day of the Plan Year and is not a Key Employee

ii.    [  ]  All Participants.  Any Participant who is employed by the Employer on the last day of the Plan Year

iii.   [  ]  Participants covered by a collective bargaining agreement will share in Top-Heavy minimum allocations provided retirement benefits were the subject of good faith bargaining.

Thank you for the reply. Which document is that?

Tom is referring to the Adoption Agreement/Plan Document. It will specify who gets the Top Heavy minimum allocation if the Plan is Top Heavy. 

The Law requires that it be allocated to non-Key participants, but the Plan can say that it is allocated to all participants including the Key participants.

Tom's example might not exactly match the document you have -- it depends on whose software created the plan documents. But all of them should have something similar.

50 minutes ago, K2retire said:

Tom's example might not exactly match the document you have -- it depends on whose software created the plan documents. But all of them should have something similar.

Thank you for the reply. I am the trustee and am responsible for all fiduciary responsibilities. I put together the plan document using resources from the DOL and IRS. I do not have a separate Adoption agreement. Is one required?

14 minutes ago, ML68 said:

Thank you for the reply. I am the trustee and am responsible for all fiduciary responsibilities. I put together the plan document using resources from the DOL and IRS. I do not have a separate Adoption agreement. Is one required?

I am hoping you aren't understanding the question.

All qualified plans must have a written document that describes the plan provisions.  it must also have a written document that sets up the trust.  These two documents often times are combined into one large "plan document".  This is not something you get from the DOL or IRS. 

Do you have a mutual fund house or broker helping you set up this plan?  Or maybe a Third Party Administrator? 

If so, they should have helped you adopt a plan document that spells out the plan provisions and spell out a number of provisions regarding the trust.  

for example, instead of a checklist the document might simply say (This example provides to all employees not just non-key employees.

(j)      Participants eligible for top‑heavy allocation. For any Top‑Heavy Plan Year, the minimum required allocation set forth above shall be allocated to the Nonelective Contribution Account of all Employees who are Participants and who are employed by the Employer on the last day of the Plan Year regardless of the Employee's level of Compensation, including Employees who have (1) failed to complete a Year of Service; and (2) declined to make mandatory contributions (if required) or, in the case of a cash or deferred arrangement, Elective Deferrals to the Plan.

......

You may ask why would you give to all not just non-key employees, but the answer would simply be "If the non-keys are getting 3% why wouldn't you want the key employees to get 3% as well.

In your case, in which the only employees are key employees the answer might be different because non-keys receive nothing.

Tom's first post matches an FT William Document I use. 

I created individually designed plans in the 80s.  Never used one without getting a DETERMINATION LETTER.  They were boiler-plate plans and were always tweeked by different reviewers, even though they were the exact same document that got DL from a prior reviewer. 

You shouldn't be flying without a net!  Get a cheap prototype.

On 8/13/2018 at 7:30 PM, K2retire said:

On 8/13/2018 at 8:28 PM, ML68 said:

Thank you for the reply. I am the trustee and am responsible for all fiduciary responsibilities. I put together the plan document using resources from the DOL and IRS. I do not have a separate Adoption agreement. Is one required?

Tom's example might not exactly match the document you have -- it depends on whose software created the plan documents. But all of them should have something similar.

Someone needs to say what we (the professionals on this site) are all thinking.   You need to hire someone who knows what they are doing, otherwise the chances are very good that you are or will screw things up.  Do you do your own dental work on you family members?  You shouldn't be doing your own retirement plan administration either.  You should at least have a competent firm that can be your consultant to make sure you are doing things right (though many of us would not take on a client that thinks he can do it himself).  Sorry if that sounds harsh, but it is the truth.  What we do is not easy and exists in a very complicated set of rules and regulations with many variations and requirements, any one of them which you can miss if you are doing this yourself.  Best of luck.

ML68 - the short (and only) answer to your question about whether a document is required is "yes".  If you do not have a written document that has been approved by the IRS, then you do NOT have a tax qualified plan (ie, all contributions that have been made to the plan are not eligible for special tax treatment).  You need to either set up a Simple Plan or a 401k plan, depending on which best suits your goals.