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Top-Heavy Tests for Qualified Plans

What is the Top-Heavy test?

Each plan year, it must be determined whether your plan is "top-heavy." A plan is top-heavy if, as of the determination date, the total account value of key employees exceeds 60% of the total account value of all employees in the plan. A key employee is:

  • An officer of the employer with compensation greater than the amount under section 416(i)(1)(A)(i). This amount is $140,000 for 2006, $145,000 for 2007, and $150,000 for 2008 (subject to cost-of-living adjustments), or

  • A more than 5% owner (and family members) of the employer, as defined in section 416(i)(1)(B)(i) of the Internal Revenue Code, or

  • A more than 1% owner (and family members) who earned more than $150,000 (not indexed) during the determination year

For existing plans, the determination date is the last day of the plan year immediately preceding the plan year being tested (i.e. for a calendar year plan, December 31, 2007 is the determination date for the 2008 plan year).

For new plans, the determination date is the last day of the current plan year (i.e. December 31, 2008 is the determination date for a calendar year 2008 plan year). This means that for new plans, you may not know your plan will be top-heavy until after the plan year is completed.

When a Plan is top-heavy or deemed top-heavy, contributions must be made for all non-key employees equal to the lesser of 3% of compensation or a percentage equal to the highest contribution rate of any key employee. 

Moving forward, a strategy to resolve the 'top-heavy' issue could be as simple as a more appropriate safe harbor plan design.  Allow us to review your plan in order to analyze and determine how you may use your plan's top-heavy status to your advantage.

Contact us for details. . .

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Monday, October 21, 2013 09:58 AM

 

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