Types of Retirement Plans - Top heavy plans
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.