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. Definition
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
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