Is Your Retirement Plan Top-Heavy?

What Does “Top Heavy” Mean?

A retirement plan is considered “Top-Heavy” if more than 60% of the plan’s assets are attributed to “key employees.” Key employees are typically defined as:

1. Officers with compensation exceeding a certain threshold. (2025 $230,000)
2. Owners of more than 5% of the business.
3. Owners of more than 1% of the business with compensation over $150,000.

Required Actions for Compliance

Maintaining compliance with Top-Heavy regulations is crucial to avoid penalties and ensure the equitable distribution of retirement benefits among all employees. Please take the necessary steps outlined below and consult your plan’s advisor for further guidance.

1. Minimum Contribution Requirement
   • You must provide a minimum contribution to non-key employees. Generally, this is at least 3% of the employee’s compensation or, if lower, the highest percentage contributed to any key employee.
   • A safe harbor formula may satisfy the Top-Heavy minimum requirement.
2. Plan Amendments
   • Review and amend plan documents if necessary to ensure they accommodate the required minimum contributions and any other compliance measures.
3. Employee Communication
   • Inform all plan participants about the Top-Heavy status and any changes to their contributions or benefits.
4. Consultation with Plan Administrator
   • Work closely with your plan administrator or a qualified retirement plan advisor to ensure all compliance requirements are met accurately and timely.

References

IRS guidelines on Top-Heavy Plans: Is my 401(k) top-heavy? | Internal Revenue Service