What happens if a 401k is top heavy

For example, the determination date for calendar-based plan year is December 31, A Key Employee is defined as any employee including former or deceased employees , who at any time during the year was:. Any employer contribution can be used to offset this top heavy minimum contribution requirement.

Safe harbor k plans are the most popular form of small business k plan in large part due to the top heavy test. Many - if not most - small plans cannot pass the test, while a safe harbor contribution will cost about the same as a top heavy minimum contribution.

There are many ways to handle a Safe Harbor plan that may be right for different employers. This effectively ensures that the plan will treat all employees equitably, which, in turn, makes it so even top-heavy plans are sure to satisfy any contribution requirements imposed by the IRS.

Learn more from one of our specialists if Safe Harbor is right for your business. Main navigation. For purposes of determining the rate of contribution received by the key employees, their own salary deferrals count as employer contributions. If Samuel and Angela continue running a small business like this and continue to contribute on their own behalf, they will likely fail the top-heavy test every plan year. While safe harbor matching plans need to provide notice to participants at least 30 days before the plan year, no such notice is required for nonelective contribution plans.

Once your money is contributed into the plan, it stays in the plan unless a distributable event occurs. Taking the money out of the plan absent a distributable event will only cause you even more expensive problems; the worst of which is that your plan can lose its tax status as a qualified plan.

You can, of course, avoid making key employee contributions in the future; however, that makes it harder for the owners to save money for their own retirement. IRC Section g fine-tunes the rules for determining whether a plan is top-heavy. Not all account balances are included in the plan, and some funds that are distributed must be added back to determine the top-heavy fraction for a time.

Here are some of those details:. When a single employer has more than one plan, the accounts of all the plans may need to be aggregated that is, added together and treated like one big plan for testing purposes.

In general, all plans that have key employee participants must be added together for the top-heavy test. This can get a little complex, so it is good to chat with your TPA about this. If a plan fails to provide the top-heavy minimum contribution when it is supposed to, that problem is easy to correct.

If the error was made within the past two plan years, the employer can self-correct by contributing the top-heavy minimum and lost earnings.