Plan Design Risk: High proportion of owners

When a large proportion of a company is made up of partners or owners, it is easy to fall outside of the limits for Top Heavy testing.

Example: ABC Law has three partners, three associates, one executive assistant, and two paralegals.  Because the partners earn more, save more, and have been with the firm longer than the other employees, the partners’ 401(k) account assets exceed 60% of plan assets and ABC Law is required to make Top Heavy minimum contributions.

If owners’ 401(k) accounts will hold more than 60% of plan assets, a Safe Harbor plan can be a cost-effective solution for addressing Top Heavy testing issues. Companies should keep their information updated, as roster changes can affect compliance testing results. 

 

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