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Top Heavy Safe Harbor Plans

“One of my clients has a safe harbor 401(k) plan and his recordkeeper told him the plan was top heavy. How could that be? I thought all safe harbor plans were exempt from the top-heavy testing rules.”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Florida is representative of a common inquiry related to safe harbor 401(k) plans.

Highlights of Discussion

No—not all safe harbor plans are exempt from the top-heavy rules.

A safe harbor plan that provides for salary deferrals and just the required safe harbor contribution (i.e., either the employer matching or nonelective contribution) would be exempt from top-heavy testing. However, there are three scenarios that would make a safe harbor plan subject to top-heavy testing, according to Revenue Ruling 2004-13:

  1. If, in addition to employee salary deferrals and the employer’s safe harbor contribution, the plan allocates an additional profit-sharing contribution;
  2. If the plan allocates forfeitures as a profit sharing contribution; and
  3. If employees are eligible to make elective deferrals upon hire but are not eligible for matching contributions until after they complete one year of service.

If your client’s safe harbor plan falls under one of the three above-listed exceptions, then the plan will have to be tested for top-heaviness. In general, a plan is considered top heavy if more than 60 percent of the plan’s assets belong to key employees. A top-heavy plan must satisfy minimum contribution and vesting requirements (see Treasury Regulation 1.416, Q&A Sections V and M).

Here are a couple of extra pointers regarding the minimum contribution requirement for safe harbor plans that fail top-heavy testing:

  • Safe harbor employer contributions can be used to help satisfy the minimum contribution requirement for a top-heavy plan.
  • When determining the top-heavy minimum contribution amount, the plan must use “full year compensation,” regardless of how the plan document defines compensation for contribution purposes (see Treasury Regulations 1.416-1, Q&As M-7 and T-21).

Conclusion

Not all 401(k) safe harbor plans are exempt from top-heavy testing. The IRS has identified three scenarios in which safe harbor plans would be required to apply the test and, if found to fail, meet minimum contribution and vesting requirements.

 

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Railroad Retirement Benefits

“I have a client who participates in a pension with the railroad. Can you give me information on the arrangement?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor is representative of a common inquiry related to Railroad Retirement Benefits.

Highlights of the Discussion
The client is likely covered by the Railroad Retirement Act and the Railroad Unemployment Insurance Act, federal laws that provide retirement and disability benefits for qualified railroad employees and their spouses, and survivor benefits for family members. The program is governed by the Railroad Retirement Board and has been in existence since the 1930s.

Railroad Retirement Benefits are provided under a federal program parallel to the way Social Security operates for nonrailroad workers. There are several differences, however. For more information, interested parties can visit the following links online U.S. Railroad Retirement Board and An Overview of the Railroad Retirement Program.

Generally, Railroad Retirement Benefits have two tiers. Tier I was designed to be equivalent to Social Security benefits, while Tier II was structured to provide additional benefits comparable to private pension plans. And those covered by Railroad Retirement Benefits can login in here to check their benefits: https://rrb.gov/Benefits/myRRB

The form of payment is an annuity at full retirement age, which is approaching age 67 (like Social Security). Payments can start as early as age 62 with a reduction in benefit amount (also like Social Security). And if an individual has at least 30 years of service with the railroad, benefits can start at age 60 with no reduction of benefit. Annuities are payable to surviving widow(er)s, children, and certain other dependents. Lump-sum benefits are payable only in limited circumstances (i.e., after the death of a railroad employee if there are no qualified survivors of the employee, and in the case of a residual lump sum death benefit).

Railroad companies can also cover their employees with their own defined contribution or defined benefit plans. Receipt of a private railroad pension (but not a 401(k) distribution) could reduce the amount of annuity benefits payable by the Railroad Retirement Board (see Private Rail Pensions May Reduce Supplemental Annuities).

Coverage under Social Security or Railroad Retirement isn’t coverage under an employer retirement plan. Therefore, such benefits may not be rolled over to a qualified plan or IRA. Additional information on Railroad Retirement Benefits is available in IRS Publication 575, Pension and Annuity Income, and IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits .

Conclusion
Railroad employees may be eligible for unique benefits paid through the federal Railroad Retirement Board, which are similar to–but different from–benefits paid from the Social Security Administration.  Railroad companies could also sponsor private qualified retirement plans for their employees.  Individuals affected by Railroad Retirement Benefits should seek tax advice to help them sort out the details of how their various retirement benefits interact with each other.

© Copyright 2024 Retirement Learning Center, all rights reserved