IRS Describes 3 Top-Heavy 401(k) Plans

The section protects 401(k) plans that contain only safe harbor salary deferrals and safe harbor employer contributions from top-heavy plan rules.

The top-heavy plan rules are meant to protect rank-and-file employees from sponsors that discriminate in favor of high-paid executives. When the IRS finds that a plan is top heavy, the sponsor must make minimum contributions or provide minimum benefits for rank-and-file employees.

The safe harbor deferral and contribution rules mentioned in Section 416(g)(4)(H), which are given in Internal Revenue Code Section 401(k)(12) and Internal Revenue Code Section 401(m)(11), set out rules that sponsors and the IRS can use to determine whether deferral and contribution rules are fair.

Simply making discretionary, nonelective contributions to a 401(k) plan puts the plan outside the scope of Section 416(g)(4)(H), because that kind of contribution is not described in the safe harbor deferral and contribution rules set out in sections 401(k)(12) and 401(m)(11), Kuehnle writes.

Requiring employees to go through a 5-year vesting period before they can receive the full amount of the nonelective contributions is also something that is not described in sections 401(k)(12) and 401(m)(11), Kuehnle writes.

In the third case, in which employees can begin making contributions immediately but must work for a year to qualify for matching contributions, the employer probably ends up offering a higher rate of matching contributions for highly compensated employees than for nonhighly compensated employees, Kuehnle writes.

The IRS has published the ruling in the Feb. 17 issue of the Internal Revenue Bulletin, at //www.irs.gov/pub/irs-irbs/irb04-07.pdf