A small company wants to start a 401(k), but the employer is very much against the idea of a profit sharing contribution and does not want any PS language in the plan at all. He's OK with a match. My question then is can we prepare an otherwise regular 401(k) plan document with only k and match contributions, with no allowance for a profit sharing? And also, if the plan become top heavy (which is a good possibility), does that in effect mean that a PS contribution has to be allowed, since the 3% goes in as a PS contribution?

Thank You

You mention that this is a small company. The smaller a plan's size, the greater the likelihood that it will have ADP and top-heavy issues. In very small plans, ADP failures and top-heavy contributions are almost certainties. Have you recommended a safe harbor contribution, either in the form of a 3% QNEC or a match?

Yes.




I would think that the plan language itself would require "top heavy contributions" rather than profit sharing contributions.

Lori: The owner is not looking to max out his portion of the 401(k) and it has been explained to him these likely problems with ADP and top heavy. His spouse will be the other HCE in the plan (legit) but does not plan to contribute, so that will help. He is prepared to scale back his contributions if the plan looks like it will fail ADP. Top heavy is more troublesome but he will make the 3% contribution if he has to.....but only if he has to.

WDIK: This is rather feeble reasoning, but my concern was that I thought that top heavy contributions were a form of a profit sharing contribution. So, even if my document has the top heavy language, it might be all for naught if a PS is not an option, which would throw the plan into chaos. Would you say that this is incorrect? Taking that 1 step further, aren't 401(k) Plans really Profit Sharing plans with a CODA? If so, how can you then have a 401(k) without a PS?

The prototype documents that I am most familiar with address the top-heavy requirements (including contribution and allocation language) in a section separate from other types of contributions and allocations. These documents also either allow an employer to indicate that the plan does not provide for "non-elective" contributions or require an affirmative election by the employer that discretionary contributions will be made.

I'm stunned. You're describing a real-life business owner who actually wants to help his employees rather than get the most personal benefit at his staff's expense. Did the earth just tip over on its axis and change its orbital path around the sun?

Another thing to consider, if I'm not sticking a foot in my mouth! A match of 4% (or 3% of first 100%, 50% 0f next 2%) is safe harbor and not considered top-heavy. Notice rquirements, vesting considerations, etc. Find 3% across the board easier to think about.

Lori: Let's give credit where it's due for the owner who wants the 401k feature primarily for the benefit of his employees. On the other hand, I think there would have to be a frost warning in hell before he would voluntarily provide a PS contribution:)

I like the 3% as well, as I think he is going to have to put something in because of Top heavy. Still, he would rather wait until the bitter end when it is determined that he has to put it in, rather than committ to it before hand.