Safe Harbor 401(k) plans automatically satisfy Top Heavy minimum contributions as long as the only employer contributions made to the plan are safe harbor contributions. If additional discretionary employer contributions, such as Profit Sharing , are made the plan may be subject to a top heavy minimum contribution (assuming the Profit Sharing contribution itself does not already meet the top heavy minimums). When Profit Sharing contributions are made in a Safe Harbor 401(k) plan, the Top Heavy test is reevaluated. If a Safe Harbor plan utilizes profit sharing and key employees are found to hold more than 60% of the total adjusted balance of the plan through top heavy testing, top heavy minimum corrections may apply to ensure all non-key employees receive a minimum 3% contribution (3% of gross compensation for the year) from the employer.
Example 1: The illustration below demonstrates the forward-looking nature of the top heavy test.
This plan exceeded the Top Heavy ratio on 12/31/21, deeming the plan Top Heavy in 2022.
If this Safe Harbor 401(k) plan makes no profit sharing allocation and maintains Safe Harbor status, no corrective action is required. Top heavy minimum requirements do not apply in plan years where the only employer contribution to the plan is a safe harbor contribution.
In 2023, if this plan makes a 2022 profit sharing allocation, the year in which the plan was Top Heavy, Top Heavy minimum corrections could be owed by 12/31/2023.
Top Heavy minimum corrections equal a 3% nonelective contribution paid to all non-key employees who are eligible to participate in the plan and employed on 12/31/2022.
If all non-key employees have already received 3% from the employer for the 2022 plan year (for example, as a profit sharing contribution or as a safe harbor nonelective contribution), no top heavy minimum correction is required.
If applicable non-key employees are found to receive an employer contribution equaling <3% for the 2022 plan year, a corrective employer contribution must be made to bring the employer contribution for each non-key employee up to 3% of gross annual compensation.
Example 2: First-year plans
If a 401(k) plan exceeds the top heavy ratio in the first plan year, the plan is deemed Top Heavy for the year of the failure and the subsequent year.
If the plan maintains Safe Harbor status, and makes no profit sharing allocation (or other discretionary employer contribution in addition to the safe harbor contributions), no corrective action is required. Top heavy minimum requirements do not apply in plan years where the only employer contribution to the plan is a safe harbor contribution.
If this Safe Harbor plan makes profit sharing contribution for the 2020 plan year (calculated and contributed in 2021), Top Heavy testing minimum contributions will apply.
If all non-key employees, eligible to participate in the plan and employed on 12/31/2020 received at least 3% of gross compensation from the employer in the 2020 plan year (for example, as a profit sharing contribution or as a safe harbor nonelective contribution), there are no Top Heavy minimum corrections.
If non-key employees are found to receive <3% of gross compensation for the 2020 plan year, a top heavy minimum contribution, bringing the employer contribution up to 3% would be owed by 12/31/2021.
If this Safe Harbor plan makes a 2021 profit share in 2022, Top Heavy minimum contributions will apply. Please refer to example 1.
Note: Top Heavy minimum corrective contributions are made to all eligible employees as of the last day of the plan year regardless of whether the employees elect to make contributions to the plan.
The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.