Top Heavy Exemption When Plan Formerly Was Not Safe Harbor

A 401(k) plan sponsor formerly had only key employees eligible to participate, so top heavy testing wasn't an issue. The plan included profit sharing contributions.

Next year, a non-key employee will become eligible. To get out of top-heavy testing, they just want to cease profit sharing contributions, allowing only the elective deferrals and safe harbor NECs (safe harbor NEC provision for non-HCEs had already been adopted when the plan was first adopted, but was basically moot until now because there were no non-HCEs).

Under IRC 416(g)(4)(H), is the plan considered exempt from top heavy testing? Going forward it "consists of" only the elective deferrals and the NEC, although it contains "old" profit sharing contributions made during the prior era.

If the plan year consists of only deferrals and the safe harbor contributions, the plan is exempt from making the top heavy minimum for that year.

Or to say another way.  The plan is still top heavy but is not required to make the top heavy minimum.

The top heavy testing doesn't go away.

Also, if the plan is providing a 3% SHNEC, then it satisfies the top heavy contribution requirement. So what's the concern??

I think I get the concern.  Merely having a discretionary profit sharing provision available does NOT trigger a top-heavy minimum contribution--only utilizing that feature would require the top-heavy minimum.  As Bill says it is moot, with the exception of comp as a participant (the top-heavy minimum being due on full year pay).

It would be a much more relevant concern (again to Bill's point) if the plan was a safe harbor match plan, because if the employee chose not to participate, they would not already be getting their 3%, so preserving the exemption would have been more important.

Also, note that if you have immediate eligibility for 401k and a 1 year wait for the safe harbor, the exemption is blown.  Not sure if that is relevant here or not, but it is such an important  landmine that I wanted to mention it.

On 12/11/2020 at 11:49 AM, Bill Presson said:

Also, if the plan is providing a 3% SHNEC, then it satisfies the top heavy contribution requirement. So what's the concern??

Not true.  It's semantics, but from: RC 416(g)(4)(H).  Note, a plan funded by only SH contribs, the plan is NOT Top Heavy.  Doesn't matter if the TH% is 5% or 99%.  Plan is not top heavy.

So, the 3% SH (or match) doesn't satisfy the TH contribution if it is the sole ER funding.  The plan is not considered TH in that case; there is nothing to correct.

Quote

(H)Cash or deferred arrangements using alternative methods of meeting nondiscrimination requirementsThe term “top-heavy plan” shall not include a plan which consists solely of—

(i)

a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13), and

(ii)

matching contributions with respect to which the requirements of section 401(m)(11) or 401(m)(12) are met.

If, but for this subparagraph, a plan would be treated as a top-heavy plan because it is a member of an aggregation group which is atop-heavy group, contributions under the plan may be taken into account in determining whether any other plan in the group meets the requirements of subsection (c)(2).

1 hour ago, BG5150 said:

Not true.  It's semantics, but from: RC 416(g)(4)(H).  Note, a plan funded by only SH contribs, the plan is NOT Top Heavy.  Doesn't matter if the TH% is 5% or 99%.  Plan is not top heavy.

So, the 3% SH (or match) doesn't satisfy the TH contribution if it is the sole ER funding.  The plan is not considered TH in that case; there is nothing to correct.

I understand your point. But that wasn't my point. If they are concerned that the plan will be top heavy, then when it is top heavy, the 3% SHNEC does satisfy the TH contribution requirement.

So, my question to the OP stands: what is the concern?

I appreciate the responses guys. It seems I have nothing to worry about.