#4
Medium Risk
Failure to Test Top Heavy Plans
Some plans may need to perform a ‘Top Heavy’ test each year to ensure lower paid employees receive minimum benefits.
- Potential Consequences
- Required 3% contributions
- Plan corrections
- Compliance violations
- Additional costs
- Prevention Tips
- Understand Key Employee vs HCE definitions
- Monitor account balances throughout the year
- Budget for potential top heavy contributions
- Consider plan design modifications
- Track employee turnover impact on testing
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Some Plans, particularly those sponsored by smaller employers, may need to perform a “Top Heavy” test each year. This test insures that lower paid employees receive a minimum benefit if, during the previous year, the aggregate value of plan accounts of “Key Employees” exceeds 60% of the aggregate value of the plan accounts of all employees under the plan.
Because the top heavy test focuses on the total value of accounts, not just contributions and deferrals made during the year, it is easier for small plans and plans with high turnover rates to be top heavy.
When a plan is top heavy, a contribution of up to 3% must be made to all non key employees still working. Plan sponsors should be aware that the term Key Employee and Highly Compensated Employee are not one and the same, and it is important to understand the difference.
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