Top Heavy Minimum Contribution

Pretax eligibility is 3 MOS     SH Match eligibility is 1 YOS   Plan is now top heavy

It is my understanding the plan cannot use the top heavy exemption.  Based on this, it is my understanding that the top heavy minimum contribution needs to pass coverage testing.  Well, it does not.  The coverage ratio is 48.75%.  The plan passes ABT, but since the coverage ratio is below the 50%, it does not pass coverage.  I believe the only solution is to add people back into as "benefiting".  Does this seem reasonable? 

The plan design is not ideal for top heavy plans.  I would have the plan change the eligibility requirements going forward, but they are in the process of terminating the plan.    

15 hours ago, justatester said:

It is my understanding the plan cannot use the top heavy exemption.

Correct.

15 hours ago, justatester said:

Based on this, it is my understanding that the top heavy minimum contribution needs to pass coverage testing.  Well, it does not.  The coverage ratio is 48.75%. 

The non-elective contribution portion of the plan needs to satisfy coverage. If the only non-elective contribution is the top heavy minimum, then yes.

Your result seems unusual though. The only way I could see to end up with that ratio would be if there were a large number of non-key HCEs who have to receive a top heavy minimum, and also a large number of non-HCEs who terminated and therefore don't get a top heavy minimum, but also worked at least 500 hours and therefore can't be excluded from the coverage test. Does that describe the situation?

Don't forget that the SH match contributions count towards the top heavy minimum. If you have any employees who are eligible for SH match and are deferring at least 3%, they would get enough of a match to satisfy the top heavy minimum and wouldn't need to get a non-elective contribution at all.

You can also disaggregate otherwise excludable employees from the coverage test, but since those will mostly be non-HCEs who have to get a top heavy minimum as a non-elective contribution (since they aren't eligible for safe harbor), it would probably hurt you more than it would help.

15 hours ago, justatester said:

The plan passes ABT, but since the coverage ratio is below the 50%, it does not pass coverage.  I believe the only solution is to add people back into as "benefiting".  Does this seem reasonable? 

Check the plan document. Many plans will include a "fail safe" provision that automatically adds people back in to satisfy a failing coverage test. If your plan contains that provision, then you must follow it. If it does not, then you might have to adopt a 1.401(a)(4)-11(g) corrective amendment to grant allocations to employees who wouldn't have otherwise been eligible for them.

Thank you for your reply...yes a very unusual situation.  I have 7/9 HCEs needing to receive a Top Heavy contributions as they were either not deferring or did not get the full 3% via match.  Plan has only 12 NHCEs and 5 termed with more than 500 hours...so a perfect storm of events. 

No fail safe lanuage...so we will be going the corrective amendment route.