Top Heavy and Safe Harbor Matching Contributions
We have had several questions regarding how Top Heavy applies when a plan contributes Safe Harbor Matching contributions.
If a plan meets the following requirements, they are exempt from top heavy for that plan year. Remember Top Heavy is an annual determination.
1. The only Employer contributions to the plan are ADP and/or ACP safe harbor non-elective or matching contributions. With this requirement, the Employer cannot make an Employer discretionary non-elective contribution. If the Employer makes an Employer discretionary non-elective contribution, the plan must satisfy the normal Top Heavy requirements.
2. All employees are eligible to receive the Safe Harbor contribution. You cannot exclude employees that have not attained age 21 and 1 year of service from receiving the Safe Harbor contribution. If you do, the plan will have liberal eligibility requirements for elective deferrals and apply the otherwise excludable exception for the Safe harbor contribution. This will cause the Highly Compensated Employees to receive a greater rate of match than the Non-Highly Compensated Employees.
3. Forfeitures are not allocated as a Employer non-elective contribution. If forfeitures are allocated, they must be allocated to reduce or supplement the ADP or ACP Safe Harbor Contribution. They may also be used to reduce administrative expenses.
4. Any discretionary matching contributions cannot trigger the ACP test.
The plan is exempt from Top Heavy if the above requirements have been satisfied. That means they are not required to make a Top Heavy contribution. If a participant receives a 2% ADP Safe Harbor Contribution and the plan would normally be considered Top Heavy, the Employer is not required to contribute an additional 1% to this employee to satisfy the minimum Top Heavy Contribution requirement. In addition, if the plan states the ADP or ACP contribution is based on date of entry compensation, the Employer is not required to make an additional contribution based on full year compensation.
Additional information can be found in Rev Rul 2004-13 and Code §416(g)(4)(H)(i) and (ii) Top-Heavy Exception.
Only the preamble to the Final 401(k) regulations mentions the fact that Safe Harbor only Plan 401(k)(12) or 401(m)(11) plans are exempt from top-heavy requirements of §416. There is no mention of the exemption in the regulations.
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