Suspending the SH Match

We have a number of clients that are considering suspending their safe harbor match due to COVID-19. There are a couple that, after doing their 2019 year-end review, would be Top Heavy for 2020. If they suspend their 2020 SH Match, will they have to owe the Top Heavy contribution for 2020? 

22 minutes ago, coleboy said:

We have a number of clients that are considering suspending their safe harbor match due to COVID-19. There are a couple that, after doing their 2019 year-end review, would be Top Heavy for 2020. If they suspend their 2020 SH Match, will they have to owe the Top Heavy contribution for 2020? 

Umm..... a safe harbor match does not meet the top heavy rules in the first place.  So IF the plan is TH and a Key gets an allocation, they will be required to make sure they meet the TH minimums.  Seems like the suspension of the 2020 SH match is not at issue for that question.  Am I missing something?

Umm, am I missing something? I thought if the plan had a safe harbor match that satisfied the ADP and ACP, it is exempt from the top heavy rules.

18 minutes ago, coleboy said:

Umm, am I missing something? I thought if the plan had a safe harbor match that satisfied the ADP and ACP, it is exempt from the top heavy rules.

Reread my answer and you will find this: So IF the plan is TH and a Key gets an allocation, they will be required to make sure they meet the TH minimums.  As too often is the case, when people write they do not provide enough info. The original question not does say this is a plan that meets the rules to avoid TH (meaning no employer PS contribution).  A plan that is designed to not have to meet TH rules is a plan that is EXEMPT from TH, not one that MEETS TH rules.  FWIW.

Coleboy -

Yes you are correct.  I understood that there were no contributions to your plan besides 401k and safe harbor.  Discontining the safe harbor match in a plan like tat could be absolutely devestating in terms of expense,.  I  think of the fast food chain with 6 months of eligibility with just a dozen managers participating.  The top-heavy minimum would be multiples of the safe harbor match.

In these situations, you have but one option. And even this option only works if the business is experiencing a "substantial business hardship."  If your client is experiencing a substantial business hardship the plan can be terminated and still maintain its safe harbor status.  There is no other way to preserve the safe harbor / top-heavy exemtpion.

Hopefully they will fix this in time through legislation.  I've already begun terminating a couple of plans because of this very very stupid rule.  I actually hold out hope that someone will look at this and say "these top-heavy rules are so stupid!" and just get rid of them. They are a cancer that attacks small businesses. I don;t think cancer is too strong a word.  Businesses that miss this rule in a manner I described will be decimated by this obligation.  And clearly some will (most often those run by ABC payroll company or XYZ bundled provider).  

Edit:  The term "substantial business hardship" has a very specific definition. Check out the regs.

Another sad effect of the top-heavy rule can be to dissuade a business from creating a retirement plan, or dissuade a service provider from taking on a small-business plan as a customer.

Before the safe-harbor regimes, I had service-provider clients that would not offer services if a prospect’s small size suggested a risk that a plan could be or become top-heavy.  One did some math and made up a hard rule to refuse a plan with fewer than 12 eligible employees.

The sales executives made these decisions.  Why?  They were tired of complaints from business owners who said they were surprised by a need for a top-heavy minimum contribution.  “Why didn’t anyone tell me . . .?”  Even when we reminded a complainer that we had presented a distinct plain-language warning about the top-heavy risk, the response always was “you know I never read anything.”  And it was too difficult to prove the oral warning we required a sales rep to deliver.  We found no warning would be enough to protect the business.  Nuisance settlements with, and wasted time on, complainers ate away at the already small margin in that line of business.  Instead, we screened out prospective customers.

I live in that market and pretty much tell owners "you're pretty much going to have to give 3% to your employees."  I don't run into many problems.

3 minutes ago, Bird said:

I live in that market and pretty much tell owners "you're pretty much going to have to give 3% to your employees."  I don't run into many problems.

Really?  Because a lot of mine are not wealthy.  Some make a relatively modest income.  Not poor, but not so wealthy that a 3% contribution would just be taken in stride.  SH Match of $10,000 a year to top-heavy minimum of $30,000 a year would be, to put it mildly, a "problem."

1 hour ago, austin3515 said:

SH Match of $10,000 a year to top-heavy minimum of $30,000 a year would be, to put it mildly, a "problem."

Not to drag this out but you're (the sponsor) pretty much spinning your wheels and wasting money with a SH match only plan.  I have a couple but hold my breath for the reasons you describe.  But wait, a company with a $1M payroll has a TH plan?  And a $10,000 contribution?  Something is wrong with that scenario.  I'm not saying I couldn't imagine it but that should be awfully rare.

Not that rare.  We have a couple fast food chains that fit the bill.  And you're saying that a SH Match only plan is not a good design?  I cant understand that.  When the work force is lower paid the owner gets an $11,000 match, maxes out his or her 401k, and the staff contribution might be next to nothing.  

4 hours ago, austin3515 said:

Really?  Because a lot of mine are not wealthy.  Some make a relatively modest income.  Not poor, but not so wealthy that a 3% contribution would just be taken in stride.  SH Match of $10,000 a year to top-heavy minimum of $30,000 a year would be, to put it mildly, a "problem."

Just to drag it out a little more.... ?

We also don't have a problem; almost all of our 401(k) plans use the 3% nonelective SH provision, because we ASSUME it will be top heavy, if not immediately, then very soon into the life of the plan.  I often tell clients: "Top Heavy isn't bad, it's good. It means you are getting most of the money in the plan, which is what you told me you want. If the plan is not top heavy, you should probably fire us because we have done a crappy job for you."

Most of the plans that you describe usually end up being a SEP or even a payroll deduction IRA program, in which the employer can pick and choose who is going to get extra money in their paycheck which they can contribute into their deductible IRA.  That almost always provides enough benefits to meet what they are trying to do, and they don't have to pay us for anything.

I agree that the vast majority of our clients WANT to get more money to the owners and don't care all that much about what the employees defer, and they are willing to buy in to the 3% (or 5% if general tested; gateway test). 

Just becauise I feel like we are operating in different realities.  You agree that if a plan has husband and wife owners making $100,000 a year, and they have 10 employees making $30,000 a year, that a safe harbor match plan design is perfect?  So they each get to contribute $19,500, get the $4,000 safe harbor match, and maybe one or two people get a $1,000 of safe harbor match? The fact that the plan is top heavy is moot because the plan is exempt from those rules.  Admittedly if the world falls apart that can be problematic, but that's just not typically in the cards (and if it really falls apart you can term under substantial hardship rules and still be exempt).

To read your responses you would think that you might advise against such a plan design? 

On 3/28/2020 at 10:31 AM, austin3515 said:

Just becauise I feel like we are operating in different realities.  You agree that if a plan has husband and wife owners making $100,000 a year, and they have 10 employees making $30,000 a year, that a safe harbor match plan design is perfect?  So they each get to contribute $19,500, get the $4,000 safe harbor match, and maybe one or two people get a $1,000 of safe harbor match? The fact that the plan is top heavy is moot because the plan is exempt from those rules.  Admittedly if the world falls apart that can be problematic, but that's just not typically in the cards (and if it really falls apart you can term under substantial hardship rules and still be exempt).

To read your responses you would think that you might advise against such a plan design? 

No, I would not.  I said "almost all of our plans..." but not 100%.  I don't like Roths either, but have written articles talking about when they do work well.  The truth is we have very few plans like that.  First, one would question whether it made sense for the spouses to take $100k each instead of one of them taking just $27,000 and maximizing his deferral at the max and the rest of the income going to the other spouse.  That avoids about 15% in SS taxes on a significant amount of money.  Then, we are normally maximizing at least one of the HCEs at the 415 maximum.  And, the 3% safe  harbor is very often paid for in the first year of the plan by NOT giving the employees raises for one year (especially if the raises were in the 3% range). And if we are maximizing an owner or two, the extra 2% (gateway), if truly paid by the employer, is only $6k out of their pocket.  With $500k of compensation, they will be able to afford $6k. 

Even though it might look like the employees are only paying for their 3% for one year, in reality they are paying for it FOREVER, even as to annual increases in future years. So it costs the employer NO additional income for the TH/Non-elective SH, which we also get to use for cross testing, and the employees start accumulating some real money in the retirement plan, the employer is a MUCH BETTER EMPLOYER than all those others because these employees are going to get the employer contribution EVEN if they don't defer a penny, so we are not discriminating among  our employees based on their own economic situations.  I have even more examples for the client about why the 3% non-elective is much better for the owners and how we can make it work for them.  Have been doing this for many years (I was part of that small group of ASPPA top guns that actually devised the safe harbor concept for Portman/Cardin oh so many years ago); it's also why almost all  of our 401(k) plans are 3% safe harbor.  The 3% nonelective with a payroll of $300k would only be $9k a year, and if taken out of salary increases, isn't really costing the employer additional dollars.

On 3/27/2020 at 2:26 PM, austin3515 said:

Not that rare.  We have a couple fast food chains that fit the bill.  And you're saying that a SH Match only plan is not a good design?  I cant understand that.  When the work force is lower paid the owner gets an $11,000 match, maxes out his or her 401k, and the staff contribution might be next to nothing.  

Larry pretty much handled this but no, I didn't say it is not a good design in certain circumstances.  In this case I would probably lean towards the SH match.  But I would also give a clear warning on how/when it could blow up - higher deferral rates for staff*, the potential need for TH minimums due to mid-year suspension, and maybe most importantly, limitations on making higher contributions if desired (in the sense that they'd have to start with a 3% staff contribution when it would be baked in with a SHNE).

*If you step back and look at this objectively, the public policy aspects of this are lousy, to say the least - high deferral rates being a bad thing...