Top Heavy Allocation to Key Employees

We have a client who would like to allocate a Top Heavy contribution to both Key and Non-Key employees. 

The language in the document regarding Top Heavy allocations is as follows: Each Non-Key Employee who is a Participant, or was eligible to be a participant in the plan year, and is employed by the Employer on the last day of the Plan Year will receive a top-heavy minimum allocation for that Plan Year, irrespective of whether he or she satisfies the Hours of Service condition under the Employer's Adoption Agreement...

Based on this language, is it permissible to allocate to Key employees? 

Any feedback is appreciated! Thank you

No. But does the document permit discretionary profit sharing contributions? If so then rely on that to provide your 3% (or whatever amount) to all employees.

There are other possibilities:

1 - This is a boilerplate provision designed to make sure that non-keys get the TH allocation regardless of hours (i.e., a 416 fail-safe provision, possibly required for IRS approval), and SOME OTHER provision of the plan turns on/off TH contributions to key employees (such as an AA option).

2 - This is saying that the allocation to TH contribution to HCEs is conditional upon meeting an HoS requirement that is stated somewhere else (e.g., AA).

3 - Both of the above.

16 hours ago, Doc Ument said:

There are other possibilities:

 

 

2 - This is saying that the allocation to TH contribution to HCEs is conditional upon meeting an HoS requirement that is stated somewhere else (e.g., AA).

 

 

Did you mean KEYs?

The language in the OP is what we use in all of our documents that we underwrite.  Too, we add a PS component, usually a new comparability scheme.  This way, the non-Keys get their piece and if the ER wants, they can get the Key EEs the same allocation via a PS.

(We also exclude HCE from the 3% Safe Harbor to give the ER flexibility in spending.)

On 8/10/2020 at 10:31 AM, NW529 said:

We have a client who would like to allocate a Top Heavy contribution to both Key and Non-Key employees. 

Other posters have alluded to this but what you really want is to allocate a 3% contribution to both Keys and Non-Keys.  As noted, your language does not permit TH to Keys so forget about calling it TH.  It's hard to imagine that you can't just declare a 3% PS and get pretty close to where you want to be, possibly adding an -11g amendment if needed.

I have a question:  Is the TH contribution subject to coverage testing?

What happens in this situation:

10 HCE including 1 Key.  All employed on last day of the year.

10 NHCE/non-Key, 6 employed at EOY.

So, the TH will go to all the HCE except the lone Key and all the NHCE at EOY.

So coverage is 67%  [ (6/10) / (9/10) ]

Note:  there is no Profit Sharing declared for the year. It's just going to be the TH contribution this year.

Did any of the NHC terminate with less than 500 hours, so that you have something other than 6/10?

At any rate, for coverage, they are considered as benefiting if they receive a Top Heavy allocation. 

1 hour ago, BG5150 said:

I have a question:  Is the TH contribution subject to coverage testing?

Yes

1 hour ago, BG5150 said:

What happens in this situation:

Does coverage pass using the average benefits test?

Does the plan document have a 410(b) fail-safe provision?

If not, then you have to do an -11(g) amendment to add benefits for some NHCEs.

Let's assume the terminated folks all worked 750 hours.

Would I have to do an 11-g amendment to give 1 NHCE some sort of allocation?

I forgot to put in my question, that there is no Profit Sharing declared for the year. It's just going to be the TH contribution this year.

And say ABT fails, too.  (Lawyer's office and all the attorneys are younger than the NHCE support staff.)

BTW:  This is an academic exercise, not a real-world situation at the moment.

BG5150, yes I meant keys / non-keys (thank you for the catch).

2 hours ago, BG5150 said:

Let's assume the terminated folks all worked 750 hours.

Would I have to do an 11-g amendment to give 1 NHCE some sort of allocation?

I forgot to put in my question, that there is no Profit Sharing declared for the year. It's just going to be the TH contribution this year.

And say ABT fails, too.  (Lawyer's office and all the attorneys are younger than the NHCE support staff.)

BTW:  This is an academic exercise, not a real-world situation at the moment.

Yes, you have to do the -11(g) amendment, otherwise you have a qualification failure.

I think the 11-g in this case is silly.

They are following the TH rules.  They aren't making a discretionary contributions, nor did they choose to exclude the participants not employed at EOY.  Unlike a last day and/or hour requirement, or excluding a class of employees for an employer contribution such as match or PS, the exclusions for TH are codified.

Come to think of it, I just looked up 416.  The minimum benefit section does not specifically mention employment on the last day of the year.  Where does it allow for those not employed at EOY to be excluded from the TH minimum?

A

defined contribution plan meets the requirements of the subsection if the employer contribution for the year for each participant who is a non-key employee is not less than 3 percent of such participant’s compensation (within the meaning of section 415). Employer matching contributions (as defined in section 401(m)(4)(A)) shall be taken into account for purposes of this subparagraph (and any reduction under this sentence shall not be taken into account in determining whether section 401(k)(4)(A) applies).

The section further goes on to discuss when the TH minimum is less than 3% and aggregation groups and the like.  I see nothing about employment requirements.  Is it in another section of the code?

Source:  https://www.law.cornell.edu/uscode/text/26/416

1.416-1 Q&A M-10

Quote

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.

20 minutes ago, BG5150 said:

I think the 11-g in this case is silly.

They are following the TH rules.  They aren't making a discretionary contributions, nor did they choose to exclude the participants not employed at EOY.  Unlike a last day and/or hour requirement, or excluding a class of employees for an employer contribution such as match or PS, the exclusions for TH are codified.

The top heavy rules are full of contradictions when compared to other sections of the code. Why can you disaggregate otherwise excludables for coverage but not for top heavy? Nondiscrimination can be tested using pay as a participant, but top heavy has to use full year compensation regardless of entry date? I could go on, but it's not going to help anything unless Congress decides to change it.

If the objection is just to having to actually having to do the amendment, you might include a 410(b) fail-safe in your plan document which would automatically bring in enough NHCEs to satisfy coverage. Another advantage of this is it might bring in someone who is unvested, allowing you to forfeit their contribution. If you do an -11(g) for a terminated participant they have to be at least partially vested.

Forgot about the tresury regs.

I know I'm fighting a losing battle.  I like these little mental exercises from time to time.