If your plan is “top heavy” then certain rules apply. This blog post outlines those rules, and your responsibilities. Accelerated vesting and minimum contributions are required during years your plan is top heavy. Your Plan Document should provide further details. 
What does the term “top heavy” mean? Your Defined Contribution Plan is “top heavy” when 60% of the assets or more are in the accounts of Key Employees.
Who is a Key Employee? Key employees own more than 5% of the company, or are directly related to the Owner (spouse, children or parents). Officers of the corporation who earn more than $160,000 (as indexed each year, $160,000-2008 & 2009), or 1% shareholders who earn over $150,000 are also Key Employees.
How do I know if my plan is top heavy? We determine the top heavy status of your plan each year. Check the Notes section on the cover letter sent with your Annual Administrator’s Report.
When is the top heavy status determined? We check the account balances on the last day of the Plan Year. If more than 60% of those assets are in Key Employee accounts, then the plan is considered top heavy for the following plan year. If this is the first plan year, then the last day of the first plan year is the determination date for both the first and second plan years.
Do all assets count in making the top heavy determination? No. Rollovers from unrelated plans, and Employer Contributions that have not yet been deposited as of the last day of the plan year can be disregarded from the testing formula.
If a Participant ceases to be a Key Employee, how does that affect the top heavy test? If a participant resigns as an officer of the corporation, or fails to meet the Compensation requirement for a 1% owner or officer, the participant is considered non-key employee. If at any time during the plan year a participant owned more than 5% of the company Stock, they are considered a key employee for that plan year.
What if a Key Employee takes a withdrawal from the plan? The withdrawal of a key employee’s assets will impact the test two years after the withdrawal. We must add back to the testing formula the amount withdrawn for both the year of the withdrawal and the year after the withdrawal. For example, if a Key Employee withdraws his account balance in 2006, the impact will not be seen until 2008.
TOP HEAVY REQUIREMENTS
Vesting: For years that a plan is top heavy, the plan must conform to the top heavy Vesting Schedule as outlined in the plan document. This schedule must be no longer than a 6-year graded schedule (20% after 2 years of service, and 20% each additional year), or a 3-year cliff vesting schedule (100% after 3 years of service).
Employer contribution required: For years that the plan is top heavy the employer must make a “top heavy minimum contribution” to the non-key employees. This minimum contribution is equal to the lesser of:
- 3% of compensation; or
- a percentage equal to the highest allocation made to any Key Employee;
- Key Employees may also receive a top heavy minimum contribution.
- The top heavy minimum contribution may be Integrated with Social Security if allowed by the plan document.
- Participants who terminated service during the year do not have to receive a top heavy minimum contribution.
- Safe Harbor Contributions, matching contributions or Qualified Non-Elective Contributions (QNEC) may be applied to satisfy top heavy minimum contributions.
Click to view Top Heavy Plan Questions (For Safe Harbor) - Part 2.
