Top-heavy test

What the top-heavy test is

Each year the plan adds up the account balances of key employees and divides by the balances of all participants. The measurement date is the last day of the prior plan year, or the last day of the first plan year for a new plan. If key employees hold more than 60%, the plan is top-heavy for the year.

A top-heavy plan must give every non-key employee who is employed on the last day of the plan year a contribution of at least 3% of their full-year pay. If the highest rate any key employee received, counting their own deferrals, is below 3%, the minimum drops to that rate.

Why it matters to employers

Small companies and new plans are the most likely to be top-heavy, because owners build balances quickly and staff turnover keeps other balances low. The minimum contribution is an unplanned cost if nobody tracked the ratio. A safe harbor 401(k) that receives only employee deferrals and safe harbor contributions is exempt.

Example with 2026 figures

On December 31, 2025, a plan holds $1,000,000. Two owners hold $700,000, or 70%, so the plan is top-heavy for 2026. One owner defers 10% of pay in 2026. Every non-key employee on the payroll at year end must receive at least 3% of 2026 pay, less any employer contribution already made for them.

Common mistakes

• Confusing key employees with highly compensated employees. They are defined differently.

• Leaving out balances of terminated key employees or recent distributions that the rules count.

• Paying the minimum only to employees who deferred, or only on pay since they joined the plan.

• Adding a discretionary match or profit sharing to a safe harbor plan and losing the exemption without noticing.