News & Views
IRS REVENUE RULING EXPLAINS
SAFE HARBOR 401(k) PLAN TOP-HEAVY EXEMPTION
A part of EGTRRA provided an exemption from top
heavy rules for a 401(k) plan that consists solely of contributions
that satisfy the ADP test and ACP test safe harbors. In a safe
harbor 401(k) plan, the employer provides a 3% nonelective contribution
to all eligible non-highly compensated employees. Alternatively,
the employer may provide a matching contribution equal to 100%
of salary deferrals up to 3% of annual compensation, and 50% of
salary deferrals between 3% and 5% of annual compensation.
In Revenue Ruling 2004-13, the IRS clarifies situations
involving the exemption from top heavy rules.
1. In a plan year in which the employer does not make an employer
profit sharing contribution and the plan does not allocate any
forfeitures, the top heavy exemption applies.
2. If the employer actually makes an employer profit sharing
contribution, in addition to the safe harbor contributions,
the top-heavy exemption does not apply.
3. If the plan allocates forfeitures in the same manner as
it allocates employer profit sharing contributions, the top-heavy
exemption does not apply.
4. If the plan permits immediate eligibility with respect to
deferrals, but limits ADP and ACP safe harbor matching contributions
to employees who have completed one (1) year of service, the
top heavy exemption does not apply.
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