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February 15, 2009

Top heavy

Your Guide



The status of a qualified plan or SEP IRA, where more than 60% of plan assets (or plan benefits) belong to key employees

Unless an exception is noted, all stock bonus, pension, or profit-sharing plans ,annuity contracts described in section 403(a) , and SEP IRAs  are subject to the top-heavy rules

  • A defined benefit plan is top heavy if, as of the determination date, the present value of the cumulative accrued benefits under the plan for key employees exceeds 60 percent of the present value of the cumulative accrued benefits under the plan for all employees
  • A defined contribution plan is top heavy if, as of the determination date, the aggregate of the accounts of key employees under the plan exceeds 60 percent of the aggregate of the accounts of all employees under such plan

Generally, every non-key employee who is a participant in a top-heavy plan must receive minimum contributions or benefits under such plan-unless exceptions apply. Different minimums apply for defined benefit and defined contribution plans.

Referring Cite

IRC 416, 26 CFR 1.416-1

Additional Helpful Information

Safe-harbor 401(k) plans automatically satisfy the top-heavy requirements, that is, as long as the contributions satisfy the safe-harbor requirements, the plan will not be considered ‘top heavy’
  • A multiple employer plan is subject to the top heavy requirements, but only with respect to each individual employer. Thus, if twelve employers contribute to a multiple employer plan and the accrued benefits for the key employees of one employer exceed 60 percent of the accrued benefits of all employees for such employer, the plan is top-heavy with respect to that employer. A failure by the multiple employer plan to satisfy the top heavy rules with respect to the employees of such employer means that all employers are maintaining a plan that is not a qualified plan.
  • A terminated plan is treated like any other plan for purposes of the top-heavy rules. For purposes of section 416, a terminated plan is one that has been formally terminated, has ceased crediting service for benefit accruals and vesting, and has been or is distributing all plan assets to the participants or their beneficiaries as soon as administratively feasible. Such a plan must be aggregated with other plans of the employer if it was maintained within the last five years ending on the determination date for the plan year in question and would, but for the fact that it terminated, be part of a required aggregation group for such plan year. Distributions which have taken place within the five years ending on the determination date must be accounted for in accordance with section 416(g)(3). No additional vesting, benefit accruals or contributions must be provided for participants in a terminated plan.
  • For purposes of section 416, a frozen plan is one in which benefit accruals have ceased but all assets have not been distributed to participants or their beneficiaries. Such plans are treated, for purposes of the top-heavy rules, as any non-frozen plan. That is, such plans must provide minimum contributions or benefit accruals, limit the amount of compensation which can be taken into account in providing benefits, and provide top-heavy vesting. A frozen defined contribution plan may not be required to provide additional contributions because of the rule in section 416(c)(2)(B).

Related Articles Tutorial or Other Content

Key employee (definition)

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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