One employee who is Key Employee

[Guest hpaine]

In a 401(k) plan, what happens if there is only one employee who happens to be the sole owner (thus being Key Employee) and is contributing to the plan. The plan is Top Heavy, but how is the corrective 3% action handled?

[WDIK]

By the term "corrective 3% action", do you mean the top-heavy minimum contribution?

[Guest hpaine]

I'm sorry, yes. The 3% TH minimum contribution owed for failing the test.

[WDIK]

I don't think that there is any need for the 3% contribution in the scenario you describe. Top-heavy rules in a defined contribution plan require that a contribution be made to all eligible nonkey participants (the document can also indicate top-heavy contributions to key employees) in an amount equal to the lesser of 3% or the highest contribution percentage rate for key employees.

[Guest hpaine]

That is what I believed to be true as well. I work for PEO that has a Multiple Employer Plan and the document does not state anything contrary to your response.

Thanks!

[david rigby]

Be careful. What does "failing the test" mean? If that refers to the ADP test, the solution is not (but could be in certain circumstances) to make a 3% T-H contribution.

[WDIK]

If the sole owner is the only employee (and there are no controlled group or affiliated service issues), there should be no problem with the ADP test either.

[Guest hpaine]

I was specifically speaking of the Top Heavy test..thanks for the input.

[Tom Poje]

Facts

410k plan

1 ee, who is key

obviously plan is top heavy

if document says all employees receive top heavy, i don't see how you can get out of not giving the 3%. whats the matter, the ee doesn't want an extra 3%? I could understand maybe short of cash, but then how is ee deferring unless the cash shortage has arisen late in the year. I know of nothing (but I could always be wrong) that says a 1 person plan does have to provide top heavy.

It would certainly be better if document said 'only non keys receive top heavy'

There is no where in the posts you indicated one way or the other.

For the current year, since it has not been determined if ee will be employed on the last day, the plan could be amended if need be...

[WDIK]

Tom:

If the highest contribution percentage rate for a key employee is less than 3 percent of compensation, isn't the minimum contribution rate reduced to the rate that applies to said key employee? If so, it follows that this participant, the only key employee, will always receive the minimum contribution rate. Have I overlooked something?

[Tom Poje]

Suppose the following:

If ee deferred 2%, then he is owed a 2% minimum. But now that means he has received a total of 4%, so he has to be given an additional 1% to bring him up to the 3%.

Thats why you would want to exclude keys from th minimums. that way you never have to put something in, but if you wanted to oput an additional profit sharing in you could.

[WDIK]

Thanks for the clarification. The issue is that salary deferrals are counted in determining the highest contribution percentage rate, but may not be used to satisfy top-heavy minimums.

[Brian Gallagher]

it's not deferral rate, it's contribution rate, so any match or p/s must be caounted too. n'est-ce pas?

[WDIK]

That was understood, but thanks for watching out for me.

[Guest hpaine]

Our document states that only non-key's will receive the TH minimum, which clearly is better for the company, although I would think the Key employee would want an add'l. 3% in his account. The company can certainly afford to do so.

Thanks for the info!

[Tom Poje]

the best of both worlds.

allocate 3% top heavy to the non keys if short on cash, otherwise simply allocate a 3% profit sharing across the board!