Do your higher-paid employees hold the majority of the funds in your company 401(k) plan? If so, your plan may be top heavy. This occurs when highly paid employees own more than 60% of plan assets. To determine if your plan is top-heavy, the IRS requires some companies to submit to a top-heavy test.<\/p>\n\n\n\n
Every year, the IRS tests employer-sponsored 401(k) plans to ensure that key employees don\u2019t hold more than 60% of plan assets as of the last day of the prior plan year. If they do, the plan is determined to be top-heavy, and plan administrators must make a minimum contribution of 3% compensation to non-key employees. This compensation is subject to a three-year cliff or six-year graded 100% vesting schedule.<\/p>\n\n\n\n
Key employees are:<\/p>\n\n\n\n
The determination of who is a key employee is based on the year before your testing date. Key employees are not to be confused with highly compensated employees (those who earn more than $150,000 annually). Highly compensated employees count towards ADP and ACP tests but not the top-heavy test.<\/p>\n\n\n\n
The top-heavy ratio is calculated by dividing the total value of key employee accounts by the total value of non-key employee accounts. The final amount is your plan\u2019s top-heavy ratio; if it\u2019s more than 60%, your plan will be considered top-heavy.<\/p>\n\n\n\n
During the top-heavy testing process, there are a few employee balances that you can exclude:<\/p>\n\n\n\n
It\u2019s possible for small businesses to become top-heavy after scaling up and hiring additional employees. To help compliance issues with your company\u2019s 401(k) plan, be sure to review the rules and regulations in your plan document. In addition to carefully reviewing your plan document, be sure to complete annual compliance testing.<\/p>\n\n\n\n
Employers may also consider switching to a safe harbor 401(k) plan. These plans are often not subject to annual nondiscrimination testing, including the top-heavy test.<\/p>\n\n\n\n
ePlan Services simplifies 401(k) compliance by preparing annual compliance tests, including the top-heavy test, for our clients following their annual plan reviews<\/a>. For further information about compliance testing, visit our Help Center<\/a>.<\/p>\n\n\n\n\n