In addition to nondiscrimination testing, qualified retirement plans are subject to Top-Heavy Rules as defined by the Internal Revenue Code. A plan is considered to be top-heavy if, at the end of the plan year, more than 60 percent of the accrued benefits (defined benefit plans) or account balances (defined contribution plans) belong to "key employees." As a general observation, top-heavy plans tend to occur more frequently with small businesses and professional partnerships.
Top-heavy plans are subject to special rules concerning minimum benefits and vesting for non-key employees. If a defined contribution plan is top-heavy, a minimum contribution of the lesser of three percent of compensation or the maximum percentage contributed to a key employee (including deferrals) must be made on behalf of non-key employees.
If a defined benefit plan is top-heavy, each non-key employee must not be less than the employee's average compensation multiplied by the lesser of two times the number of years of service or 20 percent.
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