A top-heavy plan is one that mainly favors partners, sole proprietors and other key employees. Top-heavy rules are designed to ensure lower paid employees receive at least a minimum benefit in plans where most of the assets are owned by higher paid employees.
A plan is top heavy for a plan year if, for the preceding year, the total value of accrued benefits or account balances of key employees is more than 60% of total value of accrued benefits or account balances of key employees.
B. Key employee
An employee who at any time during the plan year is:
- More than 5% owner of the employer;
- More than 1% owner of the employer with annual compensation greater than $150,000; or
- An officer with an annual compensation greater than $170,000 (2014, indexed for inflation).
A top-heavy plan must satisfy one of two minimum vesting schedules:
- Three-year cliff vesting - 100% vesting after three years of service with no minimum vesting before then.
- Six-year graded vesting - 20% vesting after second year of service, and an additional 20% each subsequent year until 100% vesting is reached after six years of service.
D. Effects on contributions or benefits
Defined contribution plans - A top-heavy defined contribution plan must make minimum contributions of at least 3% of compensation for non-key employees for the entire plan year.
- Elective deferrals by the employee do not count toward the 3% minimum.
- Defined benefit plans - A minimum benefit accrual must be made for each employee who earned a year of service in a top-heavy year, regardless of whether the employee has separated from service.
Loans from qualified plans
Small BusinessVesting is the process of accruing non-forfeitable rights.
Small BusinessDon't hesitate to adopt a smart plan for you and your employees.
Financial AdvisorDefined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
RetirementFind out how to calculate the penalties on early withdrawals from your 401(k), including the impact of the additional 10% tax penalty, vesting and income tax.
Financial AdvisorHow to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
Financial AdvisorHow to select a qualified retirement plan if you are self-employed and have no employees.
RetirementA defined contribution plan is a company retirement plan that specifies the amount of money contributed to it.
RetirementHere's how small businesses can benefit from offering a SIMPLE IRA to their employees.
TaxesThis form of executive compensation limits how these stocks can be sold. Find out more here.
RetirementMost employers don’t offer any type of retirement plan at all. But there are a few companies that still offer generous retirement benefits.