A Top-Heavy Plan With a 1,000-Hour Condition and a 1% Allocation Group
Your client sponsors a calendar-year 401(k)/profit sharing plan that is neither a safe harbor 401(k) nor a safe harbor 401(m) plan. The document conditions the profit sharing allocation on 1,000 hours of service and employment on the last day of the plan year, and conditions the top-heavy minimum contribution on employment on the last day of the plan year. At December 31, 2023, the determination date, key employee account balances total $1,300,000 and non-key balances total $700,000. For 2024 the owner (key employee, age 58, compensation $345,000) deferred $23,000 and received a 3% profit sharing allocation. Three non-key employees matter: X (full year, $40,000 compensation, 3% allocation), Y (900 hours, employed December 31, $30,000 compensation, no allocation because of the hour condition), and Z (full year, $25,000 compensation, allocated a 1% rate under the plan's group-based formula).
1. Is the plan top heavy for 2024? Show the determination and the ratio.
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Determine the determination date. The plan is not the first or last year, so the determination date is the last day of the preceding plan year: December 31, 2023. A single determination date must be used for all plans in the aggregation group.
Count the right balances. Only account balances as of the determination date count, with distributions made in the look-back period added back.
- Key employee balances: $1,300,000
- Non-key employee balances: $700,000
- Total: $2,000,000
Top-heavy ratio. $1,300,000 ÷ $2,000,000 = 65.00%.
Result. A plan is top heavy if the ratio exceeds 60%. 65.00% > 60.00%, so the plan is top heavy for 2024. That triggers the §416 minimum contribution for all non-key employees who are participants and who satisfy the plan's permissible conditions, regardless of whether the plan would otherwise pass 401(a)(4).
Watch the margin. If a former key employee had rolled out $100,000 during the look-back period, the numerator and denominator both change; recompute before concluding. Exactly 60.00% would not be top heavy.
2. Who must receive a top-heavy minimum contribution for 2024 and in what dollar amount? Address X, Y, and Z.
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The §416 minimum is the lesser of 3% of compensation or the highest allocation rate for any key employee - here 3%, since the owner's employer-provided rate is 3%.
X - full 3% profit sharing allocation of $1,200. The minimum is satisfied; no additional contribution. A profit sharing allocation does double duty and counts toward the top-heavy minimum.
Y - no profit sharing allocation, $900 required. Y fails the 1,000-hour condition but was employed on the last day of the plan year. A top-heavy minimum may not be conditioned on hours of service; the only employment condition the regulations permit is employment on the last day (and the normal statutory exclusions). Y must receive 3% × $30,000 = $900, 100% vested, not subject to the plan's allocation conditions or to forfeiture.
Z - $250 allocated, $500 top-up. Z received 1% × $25,000 = $250. The minimum adds the difference: 3% × $25,000 = $750, less $250 already allocated = $500 additional.
Total incremental employer contribution: $1,400 ($900 + $500), in addition to the regular profit sharing. Deferrals do not count toward the minimum, and the owner's own deferrals are irrelevant to the minimum rate calculation.
3. If the owner's employer nonelective allocation rate for 2024 had been 2% rather than 3%, how would the minimums change, and could the plan's matching contribution be used to satisfy them?
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Rate cap. §416(c)(2) sets the floor at the lesser of 3% or the highest allocation rate for any key employee. Elective deferrals are excluded from that rate calculation, so the owner's $23,000 of deferrals is ignored. At a 2% employer nonelective rate, the top-heavy minimum drops to 2%:
- X: 3% allocation still exceeds 2%; nothing owed.
- Y: 2% × $30,000 = $600 (previously $900).
- Z: 2% required less 1% already received = 1% × $25,000 = $250 (previously $500).
Match as a substitute. Matching contributions may satisfy the top-heavy minimum only if the plan document so provides and the match is structured to satisfy §416 - a non-safe-harbor match with no such provision cannot be used. This plan is not a safe harbor 401(k), and the document makes no allowance, so any non-key employee who deferred and received a 4% match is still entitled to the top-heavy minimum contribution on top of the match. Only if the plan had been amended to provide for it would the match count.