Is this plan up a creek?

Plan started in 2018.  Only the owners deferred.

Obviously:  ADP failed.  

Refunds done.

Obviously:  Plan is TH for '18 & '19.  Owners stopped deferring for 2019.  Not sure if any were made, but let's call it zero.

Question:  Is there any way around the $40,000 Top Heavy contribution that is due for 2018 given this fact pattern?  (No TH for 2019, as no deferrals for keys)

[I thought, aggressively, we could have  had the refunds as 12/31/18 liabilities and accrued it back and thus have EOY '18 palace of zero.  But one key was over 50, and some of his deferrals were considered catch-up and stayed in the plan....) ]

They could consult with an attorney who might be willing to help them disqualify / unwind the plan. 

Also, were the participants offerred the ability to make deferrals in 2018? If no, EPCRS says the ADP test is run without those participants in the test. In which case the HCE would be the only ones in the ADP test and it would pass. 

Still doesn't solve the TH issue, and then you would have the Missed Opportunity to Defer  correction to deal with, but just something to consider. 

I believe the plan was communicated to the plan.  I also had the disqualification idea.

So if the plan is disqualified it's as if it never existed and they can start a new one right away?

23 hours ago, BG5150 said:

Plan started in 2018.  Only the owners deferred.

Obviously:  ADP failed.  

Refunds done.

Obviously:  Plan is TH for '18 & '19.  Owners stopped deferring for 2019.  Not sure if any were made, but let's call it zero.

Question:  Is there any way around the $40,000 Top Heavy contribution that is due for 2018 given this fact pattern?  (No TH for 2019, as no deferrals for keys)

[I thought, aggressively, we could have  had the refunds as 12/31/18 liabilities and accrued it back and thus have EOY '18 palace of zero.  But one key was over 50, and some of his deferrals were considered catch-up and stayed in the plan....) ]

Let's start with your "obviously" comment.  We just set up a combination DB and 401(k) where the owners can defer $14,000 ($5k less than the $19k maximum for this year) and the employees defer nothing.  No safe harbor because it's too late in the year.  In case folks need a reminder how this works, you are allowed to ASSUME a 3% prior year average for NHCEs in the first plan year which allows a 5% average for the HCEs. In this case, the HCEs are above the comp limit of $280k, so 5% of $280k = $14,00 (and in addition, we also have the $6k catch up available, so the actual deferral for the HCEs for 2019 will be $20k of the max $25k).  Have no idea if that helps you (I'm guessing it doesn't) but I did want to challenge the "obviously" part in case this was overlooked or people forgot about it.  I realize refunds were already done, so I'm hoping this was taken into account already.

And just to confirm, I assume it is NOT a safe harbor plan in 2018 or 2019. But based on what you did say, I'm assuming that is the case.  Of course, one needs to know why it wasn't set us a safe harbor plan; was the original admin firm incompetent and didn't explain how these plans work?

As to the TH issue, assuming my assumptions above are correct, I see no way out of it other than them suing their prior advisors IF they are at fault for anything (probably not; the client probably just didn't listen or did this on its own).  The refunds are NOT liabilities as of 12/31/18.  Is the word "palace" supposed to be balance?  Assuming it is, that doesn't work either! ? 

I'll comment on the "disqualification" issue on a subsequent post. 

21 hours ago, BG5150 said:

I believe the plan was communicated to the plan.  I also had the disqualification idea.

So if the plan is disqualified it's as if it never existed and they can start a new one right away?

You won't be able to get the plan disqualified. ONLY the IRS can do that, and it is an enormous chore to get that done as it required AUTOMATIC involvement of the IRS National Office as well as Chief Counsel's office and an enormous amount of work to justify it to be done by the IRS agent and local office that is recommending it.  I have had two plans where the clients were referred to me BY the IRS regional office to help them and in both cases plan disqualification was actually the best result.  When we tried to get the done (thinking the IRS folks would be pleased to help), we found out how much they resist such an action because of the enormous amount of work they would have to do. Ultimately, the manager (who I've known for years) called and asked if it was ok with me if they just issued a closing agreement where they imposed the exact same conditions we would have had if they disqualified plan; of course, that was just fine with us (and both clients).

Having said all that, in this case there is no justification for IRS to DQ the plan and it's unlikely they would. Also, the participants have a legally enforceable right under ERISA to those monies so IRS won't DQ because they would have a DOL problem as well.

Sorry, but that's been my experience in trying to get a plan DQd.

If a plan refuses to pay the TH, isn't that a DQ event?

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And just to confirm, I assume it is NOT a safe harbor plan in 2018 or 2019. But based on what you did say, I'm assuming that is the case.  Of course, one needs to know why it wasn't set us a safe harbor plan; was the original admin firm incompetent and didn't explain how these plans work?

The original admin was a big payroll company.  Though "incompetent" may be a rough word, sometimes it think it's accurate...

To confirm:  Plan was NOT set up as SH.  No other plans.  No match.

I forgot about the 3% first year thing, but it still doesn't change the TH bugaboo.

I've encountered this a couple of times with a big payroll company, probably the same one.  Of course their contracts put all responsibility for IRC and ERISA compliance on the employer.  They don't advise, they "process".

The only other suggestion I have is that you don't necessarily have to do 3% TH minimum, if an employer contribution is to be allocated as of 12/31/18, the TH determination date, the employer need only contribute enough to get the TH ratio under 60%.   Sometimes this is quite a bit less than 3%.  

Hmmm.  That's a thought!

2 hours ago, BG5150 said:

If a plan refuses to pay the TH, isn't that a DQ event?

Sure, but that's NOT the same as disqualified!  Only the IRS can disqualify a plan; we can't do it ourselves.  So if you go to IRS and ask them to do so, they may say no. They can impose other sanctions (who knows what they will come up with), including turning it over to DOL who can figure out how to enforce the rights of the participants to that money.  Remember, the participants have a legally enforceable right to those funds, and that's where you will run into problems.  FWIW.

Under ERISA, the plan document, including the TH rules, are essentially a contract with the participants, so whether plan is qualified or not you have DOL and participant claim exposure. Although it's complicated, I think that is where the client's real exposure would be if you don't make the contribution, not IRS. IRS can only disqualify the plan, not enforce its terms. Disqualification would be very costly in the case of a mature plan, but here, for a plan that apparently has no assets, maybe not that big a deal in terms of tax consequences. If the client then starts a new plan, well...maybe it's a successor and that has some consequences. Again, perhaps complicated, although if there is no transfer of assets from the first plan to the second, the IRS might have difficulty claiming it was a successor. I am unaware of any regulation or case on that particular point, though have obviously not researched and one may exist.

I had what sounds like a very similar case 25 or so years ago. A large insurance company had provided the funding vehicle and one of its advisers had designed/sold the plan. Company had only one owner, plan was put in place very late in year, and owner was only participant who deferred. ADP failed and 100% of owner's elective deferrals returned to him. We wrote a long letter to the insurance company explaining the problem in detail, proposing that the insurance company indemnify our client for the TH cost and also proposing that it pay us to ask IRS for a PLR that the returned elective contributions didn't count for 416. (Atcually, looking at 1.401(k)-2(b)(2)(vi)(C), specifically the absence of 416 from the list of code sections that includes 404 and 415, isn't that argument still possible, assuming 100% of elective deferrals were returned as excess contributions? I thought it was worth trying at the time.) Anyway, I never got to submit the PLR, because the insurance promptly conceded and wrote the client a check for $60,000, which was the entire top-heavy contribution.