401(k) plan has various options that you can choose to find the most proper one for you. One of this options is a so called Safe Harbor that is directed and mostly chosen by the people who have established their own small businesses. These employers who have decided for this plan, often notice that their plans become a so called top heavy plans.
What does the top heavy mean?
This expression means that over 60% of all the savings collected in the account are the ownership of the leading employees. In fact, it means that this money belong to the top manager and his or her officers (key employers) and the other employees have only a little part of the retirement savings. Sounds brutal, but in fact, it is normal that the people who earn more, can also contribute more that the other staff members.
What to do if the plan became top heavy or it is very close to it?
To coordinate the contributions properly, there cannot be such a situation that any of the key employees will have no his or her allocation. If it happens, the top manager has to make a contribution in the height of 3% for all of the non - key employers who are allowed to join the 401(k) plan, or simply said - are eligible for this account. That is why this plan is called a Safe Harbor - none of the employees will be in troubles because of lack of the contributions.
Top - heavy rules of the Safe Harbor:
1. If one of the employees have joined the staff after the other employees have joined the retirement plan and it is a Safe Harbor 3% NEC, he or she will receive only this part of the contributed (by the owner of the business) money that he deserves. So, if he joined the staff at the beginning of July, he will receive only a half of this amount, because he or she did not work during the first half of the year. If he will be employed at the beginning of the year, he will become all the amount, as all the staff members, and if he will be employed in December, he will gain nothing at all.
2. If the top heavy plan is also a Safe Harbor, only the minimum amount of money has to be contributed. This minimum is 2%. In fact, it is so that if the employer makes a contribution in the height of 3%, the employee needs only to put 1% in the account to receive 2% in the future. If the employer does not make the contribution for all the workers - the employer in this situation has to contribute 2% to receive the same amount.
3. To exempt the plan from the top - heavy to a normal Safe Harbor there cannot be any contributions made by the employer. There cannot be any contribution, where the profits will be shared by the members of the staff.