Two Plans, both provide Top Heavy

We're taking over a PS Plan that is employer directed and not taking over the 401k Plan, employee directed.

In reviewing both documents, we found that both Plans provide the TH minimum. The 401k also includes some Union people but otherwise the covered employees are the same. Under the 401k, the PS eligibility is 6 months (never contributed to) while the PS is 21/12/1000. We found that no one had been doing the combined TH Test and luckily, they are not top heavy but we are thinking that only plan should provide the TH and since we are restating the PS, we'd suggest removing it from this Plan.  Are we missing anything?

If the Plans were TH, would 3% have to be given to both Plans? We have differing opinions in the office.

Thanks for any feedback    

2 hours ago, Kac1214 said:

If the Plans were TH, would 3% have to be given to both Plans? We have differing opinions in the office.

No. From what you've described, the two plans are aggregated for top-heavy purposes. Each plan does not need to satisfy the top-heavy minimum separately.

(Edit: I assumed you meant going forward, after the plan(s) have been amended. If you're talking about what would need to be done hypothetically if the plan had been top heavy for, say, 2018, I agree with ESOP Guy's response.)

Yes, it absolutely makes sense to coordinate the documents so that only one plan is providing the minimum in a year that it's required. 

As written "maybe".  I would want a lawyer to opine on that.

We see versions of this problem in the ESOP world.  Two different TPA/lawyers write the documents for the 4k and ESOP and they don't coordinate them well.  Both of them will say 415 excesses are fixed in the other document so neither document needs to fix the 415 excess as written!?!

We see the plans have different definitions of compensation and the client only wants to send one census file to both the 4k and ESOP TPA kind of problems. 

I would think it would be safest to amend one or both plans to make it clear which is responsible for the TH contribution but I don't know of any cite that says they both can't say they will but only one does it. 

Like I said I would get an attorney to fix the problem. 

I can imagine a public or private auditor or other investigator reviewing two plans that each say "this Plan shall make a 3% top heavy contribution for all non-key employees for any top-heavy plan year" and requiring the employer to fund that 3% contribution for employees who are in both plans (notwithstanding that there is a regulation saying it is unnecessary). And since in my example the plan actually stated "3%" without saying more, then I would even say that the full 3% would be required even if no key employee got more than 2%. Why? Because the plan says only "3%" and it fails to set forth the exception for when the non-key with the highest allocation rate gets less than 3% (in which case you need only provide non-keys with whatever that lower rate is).

I say all this because the regulation doesn't say that an employer can disregard a plan's TH language, it only gives permission to draft a plan with a non-duplication provision in it with respect to employees who are in both plans (i.e., eligible for a contribution in both plans).

See Questions M-1 (each plan responsible for its own participants) and M-8 (...unless an employee is in both plans) in Regulation 1.416-1.

Typically, the IRS allows employers to say (or the employer to elect) that a particular plan is "primary," such as a money purchase plan or new comparability plan.

I would assume a key ee participates in both plans so they must be aggregated for testing.

Let's suppose the plans are top heavy when combined.

Fred receives 3% from one of the plans.

Has he received the required top heavy minimum? I would say yes. so even if both plans have top heavy language I think it becomes a moot point. If Fred didn't receive 3% from either plan then he would need 3%, but again, if both plans provided then he would have gotten 6% which is more than the top heavy minimum, so deciding which plan provides the top heavy is an issue, but I don't think providing both is an issue..

While it is not the case in this situation, if it was a DB/DC combo then I think you have real issues since a DB minimum is different than a DC minimum. In addition you could have an ee who works 1000 hours and quits, so is eligible for top heavy from the DB but not the DC, and you would have real problems if the top heavy is DC only. or the ee is active but less than 1000 hours so is DC top heavy eligible but not DB top heavy. so you really need specific language in those cases.

Thanks for the responses. Key EEs in both plans so aggregation is required.

My thought is to have the 401k provide TH and to amend out of the PS Plan. Since the 401k has the Union people, it is best for that plan to provide it (with the bonus that we won't have to calculate it since it is not our plan)

Luckily, the plans are not Top Heavy so it will be have the right design if it becomes so.