Is Your Plan
Top Heavy?

Kimberly A. Reed
Principal, CPA

20 May 2019

 In addition to the ADP and ACP tests, plan sponsors need to ensure that their plan is not top heavy. The top-heavy rules generally ensure that the lower paid employees receive a minimum benefit if the plan is top-heavy. A plan is top-heavy when the total value of the plan accounts of key employees is more than 60{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of the total value of the plan assets as of the last day of the prior plan year.

If a 401(k) plan is top-heavy, the employer must contribute up to 3{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of compensation for all nonkey employees still employed on the last day of the plan year.  This contribution is subject to a vesting schedule requiring participants to be 100{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} vested after three years; or 20{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} after 2 years, 40{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} after 3 years,
60{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} after 4 years, 80{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} after 5 years and 100{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} after 6 years.

To determine if your plan is top-heavy, you must first identify key employees – any employee (including former or deceased
employees), who at any time during the plan year was:

• An officer making over $180,000 for 2019; ($175,000 for 2018 and $170,000 for 2015, 2016 and 2017);

• A 5{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} owner of the business (a 5{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} owner is someone who owns more than 5{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of the business), or

• An employee owning more than 1{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of the business and making over $150,000 for the plan year.

A non-key employee is everyone else.

When you are determining ownership interests, family aggregation rules apply. These rules may affect the treatment of stock owned directly or indirectly by family members. The rules treat any individual who is a spouse, child, grandparent or parent of someone who is a 5{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} owner, or who, together with that individual,
would own more than 5{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of a company’s stock as a 5{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} owner. As a 5{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} owner, the law considers each of these individuals a key employee for the plan year.

It’s important to note the distinction between key employees, who count for top-heavy purposes, and highly compensated employees,
who count for the ADP and ACP tests, but not the top-heavy tests.

It is important to make sure you review the top-heavy rules and definitions in your plan document. You should determine if your plan is top-heavy each plan year and be careful to properly identify owners and their family members.  


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