Is Your Plan Actually Top-Heavy? Common Triggers and Tests

Kyle McKee
Aug 22
2 min read

Every year, plan sponsors are required to perform a top-heavy test as part of their annual compliance. It’s common for plan sponsors to misunderstand what that means or underestimate the potential costs of not knowing their plan’s status.

Under IRS rules, a retirement plan is considered top-heavy when the total account balances of all key employees exceed 60% of the plan’s total assets.

Who is a Key Employee?

Anyone who owns more than 5% of the company or a related business.
An officer of the corporation who earned over $230,000 in wages in 2025.
Anyone who owns more than 1% of the company and earned over $150,000 in wages.

What Happens If a Plan is Top-Heavy?

When a plan is top-heavy, the plan sponsor typically must make a minimum contribution for eligible non-key employees, including those not actively contributing. This is where costs can add up quickly if you don’t understand your plan’s status.

Top-heavy status is determined on the last day of the plan year but applies to the following plan year. For example, if a plan is top-heavy on December 31, 2024, it will be considered top-heavy for the 2025 plan year.

Common Triggers for Top-Heavy Status

Large distributions to non-key employees that reduce their account balances.
Changes in business ownership or promotions to officer-level compensation.
Plan mergers or acquisitions.
Business downturns where only key employees continue contributing.

Is There a Safe Harbor?

Safe harbor 401(k) plans are exempt from top-heavy minimum contributions if contributions are limited to employee salary deferrals and safe-harbor contributions. If the plan sponsor makes contributions beyond safe-harbor amounts, top-heavy minimum contributions may still apply.

What Can You Do?

To avoid surprise contributions, run internal checks regularly:

Confirm key employee status after layoffs or promotions.
Watch for large distributions and ownership changes.
Don’t wait until year-end. Request a mid-year top-heavy projection if you’re concerned.

Remember: Failing a top-heavy test without meeting minimum contribution requirements can lead to costly IRS penalties or even plan disqualification.