Compliance Testing: The Top-Heavy Test - Guideline See 1.401(m)-1(f)(12)(iii). A collectively-bargained plan that includes a key employee of an employer must be included in the required aggregation group for that employer. T-17 Q. hbspt.cta._relativeUrls=true;hbspt.cta.load(3113501, 'debf0d02-698b-40ae-8d8c-b0d35aa646f9', {"useNewLoader":"true","region":"na1"}); Who Are Highly Compensated & Key Employees? A 401(k) plan is considered top heavy when the account balances of "key employees" exceed 60% of total plan assets. See Question and Answer T-6 for rules concerning required aggregation. If, on examination, the Internal Revenue Service requests a demonstration as to whether the plan is top-heavy (or super top-heavy; see Question and Answer T-33) the employer must demonstrate to the Service's satisfaction that the plan is not operating in violation of section 401(a)(10)(B). If the amount of each key employees contribution is less than three percent, including employer contributions and employee deferrals, then the top-heavy minimum contribution is only required to be the same percent as the highest contributing key employees percentage. For example, the determination date for2021 calendar-based plan year is December 31, 2020. In each year from 1980 through 1984 it has more than 500 employees. Generally, the term officer means an administrative executive who is in regular and continued service. Plan D covers employees who are included in a unit of employees covered by an agreement which the Secretary of Labor has found to be a collective-bargaining agreement between employee representatives and the employer and retirement benefits were bargained for between employee representatives and the employer. The term officer implies continuity of service and excludes those employed for a special and single transaction. Thus, in the case of the top-heavy defined contribution plan in which the non-key employee must receive an allocation, a waiver of the minimum funding requirements may eliminate a funding violation and such waiver will preclude a violation under section 416 even though the required contribution is not made. 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. However, in testing whether the plan(s) is top-heavy, an individual's present value of accrued benefits is counted only once. In the case of a defined benefit plan, the additional minimum benefit is one percentage point (up to a maximum of ten percentage points) for each year of service described in Question and Answer M-2 of the participant's average compensation for the years described in Question and Answer M-2. If, after taking such plans into consideration, the net result is that the entire group is not top-heavy, the top-heavy requirements do not apply to any plan in the group. Providing such higher accrued benefit will not cause the plan to violate section 416(d). See Question and Answer T-38 for a description of plans that need not include such provisions. In the case of one or more employers treated as a single employer under sections 414(b), (c), or (m), whether or not an individual is an officer shall be determined based upon his responsibilities with respect to the employer or employers for which he is directly employed, and not with respect to the controlled group of corporations, employers under common control or affiliated service group. HOW THE TOP-HEAVY RULES FOR 401 (k) PLANS WORK According to the plan document, both new employees became eligible for the 401(k) plan on January 1, 2020. Does safe harbor avoid top heavy? - masx.afphila.com Rul. The top-heavy minimum contribution is due to the nonkey employees by the employer's tax . For an employer who maintains or has maintained both a defined benefit and a defined contribution plan (or a simplified employee pension, SEP) and some participants do or could participate in both types of plan, what provisions must be in the plans to comply with the top-heavy requirements? Our consultants understand the importance of your relationships and will work seamlessly alongside your team. 1. T-27 Q. In the case of an employer who maintains more than one plan, employees covered under only the defined benefit plan must receive the defined benefit minimum. (See section 416(i)(1)(C).) However, if a plan uses contributions allocated to employees other than key employees on the basis of employee contributions or elective contributions to satisfy the minimum contribution requirement, these contributions are not treated as matching contributions for purposes of applying the requirements of sections 401(k) and 401(m) for plan years beginning after December 31, 1988. A. If an employer maintains (or has maintained) both a defined benefit plan and a defined contribution plan (or SEP), and the plans have or could have participants who participate in both types of plans, then the plans must contain more provisions than those described in Question and Answer T-36. In determining the early retirement benefit, the plan imposes the section 415 limits only on the early retirement benefit (not on the normal retirement benefit before applying the early retirement reduction factors). Who is eligible for top heavy minimum contribution? (Thus, a funding standard account must be maintained and a Schedule B must be filed with the annual report). Minimum top-heavy contributions must be 100% vested within six years with the following minimum schedules: Three-year cliff vesting (100% vesting upon completing 3 years of service), or Six-year graded vesting: Less than 2 years of service - 0% 2 years of service - 20% 3 years of service - 40% 4 years of service - 60% 5 years of service - 80% (a) The defined benefit minimum requires that the accrued benefit at any point in time must equal at least the product of (i) an employee's average annual compensation for the period of consecutive years (not exceeding five) when the employee had the highest aggregate compensation from the employer and (ii) the lesser of 2% per year of service with the employer or 20%. 125) of the non-key employees must reflect the required minimum contribution even though such contribution was not made. What factors must be considered in determining whether a plan is top-heavy? This ratio is tested every year based on account balances as the last day of the prior plan year (the "determination date"). M-14 Q. For example, if you have just finished the year 2020, you would calculate if the plan . For each of these plans as of their respective determination dates, the present value of the accrued benefits for key employees and all employees are separately determined. Top Heavy Plan Basics - Retirement Plan Administrators Second, unless the plans always satisfy the requirements of section 415(e) using the 1.0 factor in the defined benefit and defined contribution fractions as described in section 416(h)(i), the plans must include provisions similar to those in Question and Answer T-36 (for top-heavy) to determine whether the plan is super top-heavy and to satisfy section 416(h) if it is. Such distribution would be treated as the accrued benefit of the individual for each year through the 1991 plan year. IRS guidelines require the contribution to be made on behalf of all non-key employees who are eligible to participate in the plan and remain employed on the last day of the plan year. What minimum contribution or benefit must be received by a non-key employee who participates in a top-heavy plan? In addition, compensation received for years ending in plan years beginning before January 1, 1984, and compensation received for years beginning after the close of the last plan year in which the plan is top-heavy may be disregarded. more than a one percent owner with annual compensation exceeding $150,000 (not subject to cost-of-living adjustments). 78-223, 1978-1 C.B. The defined contribution minimum is increased to 7 At the end of each plan year, the top heavy determination is made to establish whether or not the plan is top heavy for the coming plan year. Who is a 1-percent owner of the employer? M-9 Q. In general, nonforfeitable has the same meaning as in section 411(a). Multiemployer plans, multiple employer plans and simplified employee pensions to which an employer makes contributions may be permissively aggregated with a plan covering key employees or with a required aggregation group if the contributions or benefits provided under the multiemployer plan, multiple employer plan or simplified employee pension by the employer are comparable to the contributions or benefits provided under the plan covering key employees or the plans in the required aggregation group. For purposes of section 416, a terminated plan is one that has been formally terminated, has ceased crediting service for benefit accruals and vesting, and has been or is distributing all plan assets to participants or their beneficiaries as soon as administratively feasible. Normal retirement age has the same meaning as under section 411(a)(8). How are the aggregate defined benefit and defined contribution limits under section 415(e) affected by the top-heavy rules? That means the determination is forward looking and affects the upcoming year. A plan must use the same definition of compensation for all top-heavy plan purposes for which the definition in this Q and A must be used. Solution: If the plan is not top-heavy, there is no need to run the "416 Top Heavy Minimum Calculation" report. No. (1) If the top-heavy ratio, computed considering all the key employees and only some of the non-key employees, is less than 60 percent, then it is not necessary to accumulate employee data on the remaining non-key employees. What minimum contribution or benefit must be received by a non-key employee when he is covered under both a defined benefit plan and defined contribution plan (both of which are top-heavy) of an employer and the employer desires to use a factor of 1.25 in computing the denominators of the defined benefit and defined contribution fractions under section 415(e)? In determining the present value of accrued benefits in a defined benefit plan, what standards are applied toward determining whether a subsidy is nonproportional? User fees for VCP submissions are generally based upon the current value of all assets that are associated with the Plan. In the case of unrelated rollovers and transfers, (1) the plan making the distribution or transfer is to count the distribution as a distribution under section 416(g)(3), and (2) the plan accepting the rollover or transfer is not to consider the rollover or transfer as part of the accrued benefit if such rollover or transfer was accepted after December 31, 1983, but is to consider it as part of the accrued benefit if such rollover or transfer was accepted prior to January 1, 1984. Properly contribute and allocate the required top-heavy minimum, adjusted for earnings, to the affected non-key employees. A 401 (k) Plan is a calendar year plan and starts in 2021. However, in testing whether a plan or group is top-heavy, an individual's accrued benefit is counted only once. If the above conditions are satisfied, then the plan is still exempt from the minimum funding requirements under section 412 and may still utilize the special accrued benefit rule in section 411(b)(1)(F) subject to the following modifications: Although the portion of the plan funded by the level premium annuity contract is exempt from the minimum funding requirements, the portion funded by an auxiliary fund is subject to those requirements. A permissive aggregation group consists of plans of the employer that are required to be aggregated, plus one or more plans of the employer that are not part of a required aggregation group but that satisfy the requirements of sections 401(a)(4) and 410 when considered together with the required aggregation group. A more than 5% owner, regardless of . Irrevocable Opt-Out and the Top Heavy calculation T-3 Q. 415 full-year gross compensation. After aggregating all employees (including leased employees within the meaning of section 414(n)) of employers required to be aggregated under section 414(b), (c) or (m), there is a maximum limit to the number of officers that are to be taken into account as officers for the entire group of employers that are so aggregated. The top heavy minimum contribution is based on the amounts contributed by key employees. However, the special rules in section 416 (b), (c), or (d) applicable to top-heavy plans do not apply with respect to any employee included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective-bargaining agreement between employee representatives and one or more employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. Also, a waiver of the minimum funding requirements will not alter the requirements of section 416. speed velocity and acceleration worksheet with answers. In making this determination, only the employer's contribution to the simplified employee pension may be used. Plan A covers key employees and independently satisfies the requirements of sections 410 and 401(a)(4). If youve been operating a 401(k) plan covering only you and your spouse, and you hire other employees who become eligible under the plan, you'll probably have to make required minimum contributions if the new employees are non-key employees. (b) For purposes of the defined benefit minimum, years of service with the employer are generally determined under the rules of section 411(a) (4), (5) and (6). However, for plan years beginning prior to January 1, 1985, amounts which an employee elects to have contributed to a plan described in section 401(k) are not treated as employer contributions for these purposes. However, in the first plan year of the plan, the adjustment in (b) should also reflect the amount of any contributions made after the determination date that are allocated as of a date in that first plan year. An official website of the United States Government. This rule is effective for purposes of determining whether a plan is top-heavy for plan years which begin after February 28, 1985. L. 97-248) (TEFRA), and amended by sections 524 and 713(f) of the Tax Reform Act of 1984 (Pub. An employer must set forth in the plan document the method he will use to meet the requirements of Question and Answer M-12 or M-14, as the case may be. A Corporation maintains a profit-sharing plan and a defined benefit plan, and these plans constitute a required aggregation group. Top Heavy Rules May Impact Plan Design - Red Bank Pension Services Account owners assume all investment risks as well as responsibility for any federal and state tax consequences. On June 30, 1987, the five owners of Corporation K sold all of their shares of stock. This is not to be confused with the Actual Deferral Percentage (ADP) test, which limits the average deferrals . A. When you invest in a 529 plan, you are purchasing municipal securities whose value may vary based on market conditions. M-3 Q. PDF Chapter 3 Compensation - IRS tax forms Thus, the account balance will include contributions waived in prior years as reflected in the adjusted account balance and contributions not paid that resulted in a funding deficiency. Generally, every non-key employee who is a participant in a top-heavy plan must receive minimum contributions or benefits under such plan. If the Employer maintains this Plan and one or more Defined Benefit Plans, any Top Heavy minimum contribution will be provided under this Plan, but the minimum required contribution is increased from 3% to 5% of Total Compensation for the Plan Year. The top heavy determination is one of the nondiscrimination tests required by the IRS to ensure plans do not disproportionately favor certain owners and officers. The distribution from a defined contribution plan (including the cash value of life insurance policies) of a participant's account balance on account of death will be treated as a distribution for purposes of section 416(g)(3). is considered to be top heavy when more than 60% of plan assets are attributable to "key employees" as of the "determination date". This contribution is subject to a vesting schedule requiring participants to be 100% vested after three years; or 20% after 2 years, 40% after 3, 60% after 4, 80% after 5 and 100% after 6 years. A. See Question and Answer T-7 for rules concerning permissive aggregation. For plan years beginning after December 31, 1984, the accrued benefit of an employee who has not performed any sevice for the employer maintaining the plan at any time during the five-year period ending on the determination date is excluded from the calculation to determine top-heaviness. top heavy calculation - 401(k) Plans - BenefitsLink Message Boards Q. This allows plan sponsors to know in advance whether or not their plans will be top heavy and take any appropriate action steps rather than finding out after the fact. However, if the benefits or contributions under Plan B were comparable to those under Plan A, the two plans would be permitted to be aggregated to determine whether or not the group consisting of both plans is top-heavy. However, a plan will not be considered to violate the requirements of section 412(i) merely because it funds certain benefits through either an auxiliary fund or deferred annuity contracts, if the following conditions are met: (1) The targeted benefit at normal retirement age under the level premium insurance contract is determined, taking into account the defined benefit minimum that would be required assuming the current top-heavy (or non top-heavy) status of the plan continues until normal retirement age; and. A. Will a plan fail to qualify if it provides that the $200,000 maximum amount of annual compensation taken into account under section 416(d) for any plan year that the plan is top-heavy may be automatically increased in accordance with regulations under section 416? Must a collectively-bargained plan be aggregated with other plans of the employer to determine whether some or all of the employer's plans are top-heavy? In this particular situation, in order to satisfy the requirements of section 416(c), the employer must provide the defined contribution minimum, 5% of compensation. Under section 416(i)(1), a key employee is any employee (including any deceased employee) who at any time during the plan year containing the determination date for the plan year in question or the four preceding plan years (including plan years before 1984) is: 1. If the employee fails to earn a year of service in the next year, but does earn a year of service in the fifth year, the employee's average annual compensation is calculated by dividing the employee's aggregate compensation for years one, two, three, and five by four. Any assumptions which reflect a reasonable mortality experience and an interest rate not less than five percent or greater than six percent will be considered as reasonable. What Is a Top-Heavy Retirement Plan? - Watkins Ross The contribution made or required to be made on behalf of any key employee is equal to the ratio of the sum of the contributions made or required to be made and forfeitures allocated for such key employee divided by the compensation (not in excess of $200,000) for such key employee. Which employees must receive the defined contribution minimum? 1/2 percent interest and the largest interests in the employer (see Question and Answer T-19), 3. If no key employees receive any contributions, the top heavy minimum contribution is 0%. The accrued benefits attributable to employee contributions are considered to be part of the accrued benefits without regard to whether such contributions are mandatory or voluntary. We have a fundamental understanding of how critical plan compliance is to both the IRS and Department of Labor. However, see Questions and Answers M-4 and M-10 for certain exceptions. An officer of the employer having annual compensation from the employer for a plan year greater than 150 percent of the dollar limitation in effect under section 415(c)(1)(A) for the calendar year in which such plan year ends (see Questions and Answers T-13, T-14, and T-15). Thus, such a benefit would be a nonproportional subsidy if the group of individuals who are limited by the limitations under section 415 do not, by themselves, constitute a cross section of employees that could satisfy section 410(b). (c) Second, the plan must specifically contain the following provisions that will become effective if the plan becomes top-heavy: vesting that satisfies the minimum vesting requirements of section 416(b), benefits that will not be less than the minimum benefits set forth in section 416(c), and the compensation limitation described in section 416(d). M-12 Q. Thus these contributions must meet the nondiscrimination requirements of section 401(a)(4) without regard to section 401(m). Thus, if a non-key employee had already accrued a benefit of 20 percent of final average pay at the time the plan became top-heavy, no additional minimum accruals are required (although the accrued benefit would increase as final average pay increased). A. 415 full-year gross compensation. However, the plan must state the definition of compensation for purposes of determining who is a key employee. The fact that this fractional rule would not satisfy the defined benefit minimum may be illustrated by the following example. 76-259, 1976-2 C.B. However, a top-heavy plan may continue to provide for any benefits attributable to compensation in excess of $200,000 to the extent such benefits were accrued before the plan was top-heavy. (b) First, the plan must contain provisions describing how to determine whether the plan is top-heavy. If the plan's single benefit structure does not assure that section 416 (b), (c), and (d) will be satisfied in all cases, then the plan must include three types of provisions. To qualify for the free pass, contributions must be limited to only salary deferrals and safe harbor contributions. Similarly, an employee who does not have the title of an officer but has the authority of an officer is an officer for purposes of the key employee test. Yes. A. Yes, plans may be permissively aggregated to avoid being super top-heavy. (See Questions and Answers T-24 and T-25 for more specific rules.). (a) If the defined benefit plan has no participants who are or could be participants in a defined contribution plan of the employer (or vice versa), the defined benefit plan (or defined contribution plan) need not include provisions describing the defined benefit or defined contribution fractions for purposes of section 415 and, thus, the plan need not contain provisions to determine whether the plan is super top-heavy or to change any plan provisions if the plan becomes super top-heavy. They are in the census in our software program, classified as being . V-6 Q. (c) Once aggregated, all plans that are required to be aggregated will either be top-heavy or not top-heavy, depending upon whether the aggregation group is top-heavy. 4. The other 2 doctors have signed irrevocable waivers of participation and are not part of the plan. The top-heavy test ensures that qualified retirement plan (QRP) participants identified as key employees do not receive a disproportionate amount of benefits when compared to nonkey employees. Under Internal Revenue Code Section (IRC Sec.) Further, if Plan B provided contributions or benefits that were not at least comparable to the contributions or benefits provided under Plan A, then Plan B could not be permissively aggregated with Plan A because the contributions and benefits would discriminate if the two plans were considered as a unit. (b) All employers that are aggregated under section 414 (b), (c), and (m) must be taken into account as a single employer for the plan year in question, and those employees in all plans maintained by the employers that are aggregated must be categorized as key employees, as former key employees, or as non-key employees. Nondiscrimination Testing: Top Heavy Determination, 5% of the plan sponsor or a related employer, An individual who owns more than 1% of the plan sponsor or a related employer AND has annual compensation exceeding $150,000, An officer of the plan sponsor or a related employer with annual compensation exceeding $170,000 (indexed for future years). A non-key employee may not fail to accrue a minimum benefit merely because the employee was not employed on a specified date. A. The methods set forth in this answer may also be used to determine whether a plan is super top-heavy by inserting 90% for 60% in the appropriate places. The "416 Top Heavy Determination" report should be run to reflect the top-heavy status to be delivered to the client. A. How do I get out of this employer contribution to my retirement plan? First, the present value of the accrued benefits (including distributions for key employees and all employees) is determined separately for each plan as of each plan's determination date. T-14 Q. What distributions are added to the present value of accrued benefits in determining whether a plan is top-heavy for a particular plan year? How are frozen plans treated for purposes of the top-heavy rules? A. In all cases, the present value of accrued benefits . For an employer who has no employee who has participated or is eligible to participate in both a defined benefit and defined contribution plan (or a simplified employee pension, SEP) of that employer, what provisions must be in the plan(s) to comply with the top-heavy requirements? What requirement plans are subject to the top-heavy rules added to the Code by the Tax Equity and Fiscal Responsibility Act and amended by the Tax Reform Act of 1984? In all cases, the present value of accrued benefits includes distributions made during the plan year containing the determination date and the preceding four plan years. No. For example, a corporation with only one officer and two employees would have only one officer for purposes of section 416(i)(1)(A)(i). For example, if the employer determined the present value of accrued benefits for key employees in a simplified manner which overstated that value, determined the present value for non-key employees in a simplified manner which understated that value, and the ratio of the key employee present value divided by the sum of the present values was less than 60 percent, the plan would not be considered top-heavy. Top Heavy minimum contribution Sample Clauses | Law Insider If, however, all key employees are below 3%, the required contribution is equal to the highest percentage received by any of the keys. A. 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