If a 401(k) plan is top heavy, it means that 60% or more of the assets in the plan are owned by "top employees." Top employees are those that are the most highly paid, and typically own 5% or more of their company and/or hold an officer position.
If a 401(k) plan is determined to be top heavy, then the employer must make contributions to non-key employees in order to bring the plan back into balance. The contributions must be 3% of the employee's salary or the same as the highest contribution made to a key employee, whichever is lower.Top Heavy 401(k) Plan Consequences
Top Heavy 401(k) Plan FAQs
A Top Heavy 401(k) Plan is an employer-sponsored retirement plan that is subject to certain requirements set by the Internal Revenue Service (IRS). To qualify as top heavy, at least 60% of the total assets in the plan must be held by key employees of the company.
To qualify as a Top Heavy 401(k), employers must meet certain criteria set by the IRS, including: offering at least three or more participants; having total contributions from key employees reach at least 60% of all plan assets; and meeting minimum coverage and nondiscrimination testing requirements.
A Top Heavy 401(k) offers several benefits, including: tax savings for employers, improved retirement savings for employees, and enhanced retirement security for key employees. .
The main drawback of a Top Heavy 401(k) Plan is that it can be expensive to manage and maintain due to the added administrative complexity and testing requirements imposed by the IRS. In addition, if not managed properly, it can lead to high-income earners having too large an account balance relative to other plan participants, resulting in higher taxes and potential penalties.
Yes, failure to meet the requirements of a Top Heavy 401(k) Plan can result in significant financial penalties from the IRS, including tax assessments and employer contributions to plan participants. Therefore, employers should be diligent in ensuring their plans are structured and maintained properly.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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