My 401(k) failed the Top-Heavy test. Now what?

401(k) | Business Strategy | Business Retirement Planning

 Matt Baisden By: Matt Baisden

What is the top-heavy test?

401(k) plans must be tested annually to determine if they are top-heavy. The top-heavy test 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 plan balance the plan is determined to be top heavy.

Balances for key and on-key employees are adjusted for distributions, rollovers, terminations, and other factors. If your plan is close to or already top-heavy, it is important to understand how flows into and out of the plan will affect your top-heavy test.

Who are key employees?

Key employees are the owners and officers of the business. They fit into one of the categories below at any point during their plan year.

  • An individual who owns more than 5% of the business
  • An individual who owns more than 1% of the business AND has annual compensation exceeding $150,000
  • An officer of the business with annual compensation exceeding $185,000 (*as of 2021, indexed for future years)

There are additional rules that concern ownership attribution, officer definition and other items. Please consult with your advisor or third-party administrator to ensure your “key employee” designations are correct.

What if I fail the test?

If your plan is determined to be top-heavy you must contribute to non-key employees the lower of:

  • 3% of total plan year compensation (even if employee is only participant for part of year)
  • The highest percentage contributed to or for any key employee.

For example, if the highest contribution to a key employee’s account (combined between employee and employer contributions) is 2%, the plan must give non-key employees a 2% contribution. Key employees can, but do not have to, take part in any top-heavy contributions. The rules for that contribution are outlined in your plan document.

Top heavy contributions can be offset by contributions already made to the plan by the employer.

My plan is top heavy, what do I do?

There are two options in the short term to solving a top-heavy issue.

  • Use a safe harbor contribution

Employers can contribute to the retirement plan with a Safe Harbor Non-Elective or Safe Harbor Match formula. Using either would allow a company to avoid top-heavy contributions, but there are other requirements.

Safe harbor contributions and employee deferrals can be the only contributions to the plan. If any other employer contributions are made, such as a profit-sharing or a match that doesn’t follow a safe harbor formula, the top-heavy exemption goes away. In addition, the entry and eligibility periods for deferrals and safe harbor contributions must match.

  •  Limit key employee savings

If a business owner is the only key employee, they may choose not to contribute to the plan at all. The key employee contribution rate would be 0%, so no top-heavy contributions would be necessary. This strategy may work, but the owner must be diligent and accept that the 401(k) plan now has limited benefit to themselves.

Longer term, a solution should focus on growing the balances of non-key employees. Increasing participation rates and average deferral rates, decreasing plan costs, and improving investment options are all ways to help grow non-key employee balances.

If you are having trouble with top-heavy testing in your company, please reach out to us. It is common for small business 401(k) plans to be top-heavy. We’ve helped manage this situation for several clients. Schedule a meeting with me.


Sources of Information. We derive our information from a variety of sources we consider reliable, including historical data from fund managers, exchange data, published research, industry digests, news media, and from research provided by our principals and employees, which is proprietary, but we do not guarantee that the information is accurate or complete.

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With four years’ of portfolio management experience under his belt, Matt came to Plancorp in 2016 to join our Retirement Plan Advisors practice. He loves helping business owners build retirement plans that make their companies stronger and give owners the ability to retire when they want. More »