Although sometimes confused with ADP/ACP discrimination testing (a utilization test), Top-Heavy is an asset-based test that compares the account balances of key employees to those of non-key employees. If the sum of all key employee balances exceeds 60% of the total balances in the entire plan as of the determination date, the plan is top-heavy.
If the plan is deemed top-heavy, it must meet a minimum contribution requirement for non-key employees. Typically, this means that active, non-key employees must receive an employer contribution or benefit equal to at least 3% of their compensation. Key employees are not required to receive such contributions. The minimum contribution requirement is waived if, for the top-heavy year, either 1) key employees do not contribute or 2) only deferrals and safe harbor contributions are made.
Divide the participants into key employees and non-key employees and take the sum of their respective account balances as of the determination date with the following adjustments:
- Subtract all unrelated rollovers
- Subtract all amounts related to participants who have not worked for one year
- Subtract all amounts related to participants who used to be but are no longer key employees
- Add back termination distributions that were paid during the twelve months ending on the determination date
- Add back all in-service distributions paid during the five-year period ending on the determination date