A retirement plan is considered top-heavy for a plan year when more than 60% of its total assets are held in the accounts of Key Employees as of the last day of the prior plan year. A Key Employee is defined as someone who meets any of the following criteria:

  • A more-than-5% owner
  • The spouse, parent, child, or grandparent of a more-than-5% owner
  • A more-than-1% owner earning over $150,000
  • Officers making over $230,000 for 2025 (this amount is adjusted annually for inflation)

Why Does Top-Heavy Status Matter?

If a plan is top-heavy, the employer is typically required to make a minimum 3% contribution for the plan year to all eligible non-key employees, regardless of whether they make 401(k) salary deferrals and contribute to the plan themselves. This can significantly increase the company’s total retirement plan cost for the year. Further, if the plan doesn’t satisfy the top-heavy minimum contribution, it risks losing its tax-qualified status, which can trigger penalties and jeopardize valuable tax benefits.

How to Reduce the Uncertainty

One of the most effective ways to avoid top-heavy surprises is to adopt a Safe Harbor contribution formula within the plan. The Safe Harbor contribution can be either:

  • A Safe Harbor Nonelective contribution of at least 3% of compensation, or
  • A Safe Harbor Matching contribution equaling 3.5 to 4% of compensation depending on the specific safe harbor and plan design characteristics.

If the plan adopts a Safe Harbor contribution formula, provides applicable notices, and has only Safe Harbor and 401(k) salary deferral contributions for the plan year, the plan automatically satisfies the top-heavy requirements. As a bonus, Safe Harbor plans also avoid ADP nondiscrimination testing.

Top-heavy rules can catch employers off guard, but choosing a Safe Harbor design can bring predictability, simplify compliance, and provide a clearer picture of plan costs each year. If you have any questions about top-heavy testing or Safe Harbor plan designs, please contact your Blue Ridge Associates Plan Consultant.