How 401(k) Top-Heavy Plan Rules and Testing Work

A 401(k) plan falls under the 401(k) top-heavy rules when key employees hold more than 60% of the plan’s total account balances. When that happens, the employer generally must contribute at least 3% of compensation to every non-key employee’s account and apply an accelerated vesting schedule to employer contributions. For the 2026 plan year, a key employee is any officer earning more than $235,000, anyone who owns more than 5% of the business, or a 1% owner earning more than $150,000.¹² Small businesses hit this threshold more often than large ones, because a single owner’s balance can easily dominate a plan with only a handful of participants.

Who Counts as a Key Employee

A participant is a key employee for the plan year if they fall into any one of three categories:

An officer earning more than $235,000 in annual compensation for 2026 (the figure was $230,000 in 2025 and adjusts periodically for inflation).¹
A more-than-5% owner of the employer’s stock, or of the capital or profits interest for a partnership or LLC.²
A more-than-1% owner earning more than $150,000. This dollar figure is fixed in the statute and does not adjust for inflation.²

Family Attribution

You don’t have to hold shares in your own name to be treated as an owner. Stock held by your spouse, children, grandchildren, or parents is attributed to you as if you owned it personally.³ Grandparents, siblings, aunts, and uncles are not covered, so only the direct family chain matters. This blocks a common workaround: spreading shares among immediate family to slip below the 5% or 1% ownership lines.

How the 60% Test Works

The plan is top-heavy when the combined account balances of all key employees exceed 60% of the total balances across every participant. Both employer and employee contributions count toward each person’s balance.⁴

The measurement takes place on the “determination date,” which for an ongoing plan is the last day of the preceding plan year. For a brand-new plan, it’s the last day of that first plan year.⁵ For a calendar-year plan, the December 31 balances from last year decide whether this year’s plan is top-heavy.

What Gets Added Back and Excluded

The calculation isn’t a simple snapshot. Certain distributions made during the one-year period ending on the determination date, including hardship withdrawals, get added back to balances. That prevents a key employee from lowering the ratio by pulling money out just before the measurement date.⁴

Former employees who didn’t work a single hour during that same one-year period are excluded entirely, from both the numerator and denominator. Someone who left two years ago but kept their balance in the plan won’t skew the results. Rollovers transferred in from an unrelated employer’s plan are also generally excluded.⁴

Aggregating Multiple Plans

Employers running more than one retirement plan can’t test each plan in isolation. A “required aggregation group” bundles together every plan in which a key employee participates, plus any other plan the employer needs to satisfy nondiscrimination or minimum coverage rules. The combined balances across the whole group must pass the 60% test, and if the group is top-heavy, every plan in it is top-heavy.²

There is also an optional “permissive aggregation group.” The employer can voluntarily fold in a plan that isn’t otherwise required to be part of the group, provided the expanded group still passes nondiscrimination and coverage rules. A plan with large non-key balances can pull the group’s overall ratio below 60% and keep it out of top-heavy territory.² Employers with multiple plans should model both groupings each year.

The 3% Minimum Contribution

Once a plan is top-heavy, the employer generally must contribute at least 3% of each non-key employee’s total annual compensation. Every non-key employee still employed on the last day of the plan year gets this contribution, whether or not they chose to defer any of their own pay. Compensation for this purpose means pay for the full year, not just the portion earned after enrollment.⁴

One narrower rule: if the highest contribution rate any key employee receives is below 3%, the employer only needs to match that lower rate for non-key employees. If the top-contributing key employee received 2%, everyone else gets at least 2%. When calculating that key employee rate, both employer contributions and the key employee’s own elective deferrals count.⁴

What Counts Toward the Minimum

Only employer money counts toward satisfying the top-heavy minimum for non-key employees. Elective deferrals made by non-key employees themselves do not count. If a non-key employee defers 5% of pay and the employer matches 2%, the employer cannot treat the employee’s 5% deferral as satisfying the 3% requirement. Only the 2% match counts, leaving a 1% shortfall the employer must fund separately.⁶

Existing employer matching contributions and nonelective contributions do count. An employer already making a 3% nonelective contribution to every eligible employee satisfies the requirement without any additional deposit.

Faster Vesting for Employer Contributions

Top-heavy plans must give non-key employees faster ownership of employer contributions. The plan must use whichever of two schedules is more generous than what its own plan document already provides:⁷

Three-year cliff vesting: the employee owns 0% of employer contributions until completing three years of service, then becomes 100% vested at once.
Six-year graded vesting: 20% after two years, 40% after three, 60% after four, 80% after five, and 100% after six years of service.⁵

These schedules apply only to employer contributions. An employee’s own salary deferrals are always 100% vested immediately under federal law. Plans should include top-heavy vesting provisions in the plan document even when the plan isn’t currently top-heavy, because status can shift from year to year.⁷

The Safe Harbor Escape

Many small employers sidestep the entire top-heavy exercise by running a safe harbor 401(k). A plan that consists solely of safe harbor contributions and elective deferrals is not treated as top-heavy, no matter how concentrated the balances are.⁵

Under a traditional safe harbor plan, the employer commits at the start of each plan year to either a matching formula (generally dollar-for-dollar on the first 3% of pay deferred, then 50 cents on the dollar for the next 2%) or a nonelective contribution of at least 3% of compensation to every eligible employee. The plan must satisfy annual notice requirements, and safe harbor contributions must be 100% vested immediately.⁴⁸ A qualified automatic contribution arrangement (QACA) is a safe harbor variation that pairs automatic enrollment with employer contributions and allows a two-year cliff vesting schedule on those contributions.⁵

The exemption disappears the moment the employer adds contributions beyond the safe harbor formulas. Discretionary profit-sharing contributions, for instance, pull the entire plan back into top-heavy testing.

Fixing a Missed Top-Heavy Contribution

Missing a required top-heavy minimum contribution is common, especially at growing businesses where balance ratios shift year to year. The IRS provides a formal correction framework rather than immediately disqualifying the plan.

The corrective action itself is straightforward: the employer deposits the missed contribution (generally 3% of compensation for each affected non-key employee) plus an adjustment for lost earnings through the date of correction. The lost earnings piece exists because the money should have been invested in the employee’s account all along.⁹

How you file depends on how the mistake surfaced. If the employer catches the error internally and has reasonable compliance practices in place, the Self-Correction Program lets you fix it without filing anything with the IRS or paying a fee, subject to a three-year window for significant errors. If the plan isn’t under audit, the Voluntary Correction Program allows a formal submission with a user fee based on plan asset size. If the IRS finds the failure during an audit, correction happens through a closing agreement that includes the missed contribution, lost earnings, and an additional sanction tied to the severity of the failure.⁹

Self-correction is by far the cheapest and least disruptive path, which is why running the top-heavy test promptly each year matters. Catching the problem in the current year lets you simply deposit the contribution. Discovering it three years later means recalculating lost earnings across multiple years, with the dollar amounts and paperwork multiplying accordingly.

1
Internal Revenue Service. Notice 2025-67: 2026 Amounts Relating to Retirement Plans and IRAs
2
Office of the Law Revision Counsel. 26 USC 416 – Special Rules for Top-Heavy Plans
3
Office of the Law Revision Counsel. 26 US Code 318 – Constructive Ownership of Stock
4
Internal Revenue Service. Is My 401(k) Top-Heavy?
5
Office of the Law Revision Counsel. 26 US Code 416 – Special Rules for Top-Heavy Plans
6
Internal Revenue Service. SARSEP Fix-It Guide – You Didn’t Make Required Top-Heavy Minimum Contributions to the SARSEP
7
Internal Revenue Service. Fixing Common Plan Mistakes – Top-Heavy Errors in Defined Contribution Plans
8
Internal Revenue Service. Vesting Schedules for Matching Contributions
9
Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Was Top-Heavy and Required Minimum Contributions Were Not Made to the Plan