Business 401(k) Services / Plan Administration

Does Your Business Have a Top-Heavy 401(k)? Consider Adding Safe Harbor

It’s no secret that in the world of 401(k), the rules that make sure employees are protected can be extensive and sometimes difficult to navigate. In the past, we’ve written about 401(k) compliance testing and the responsibility placed on employers to proportionally benefit employees at all levels of compensation.

Today, we’re taking a look at another phenomenon in 401(k) that involves potential discrepancies between how a company’s owners and officers participate in a plan, versus the rank-and-file employees. When key employees and owners own more of the assets in a plan than the rest of the employee base, it’s said to be “top-heavy,” and that can have serious implications, especially for small and mid-sized businesses.

What is a Top-Heavy 401(k)?

A 401(k) plan is considered “top-heavy” when 60% or more of the assets in the plan are owned by “key employees.” A key employee is any of the following:

  • Anyone who owns 5% or more of the company sponsoring the plan
  • Anyone who owns 1% or more of the company sponsoring the plan and who also earns more than $155,000 annually from those companies
  • Anyone who holds an officer position at the company sponsoring the plan or at a related employer, and who also earns more than $220,000 (for 2024) from those companies

If an employer owns more than one business, these rules apply to anyone who has an ownership stake in any of the related companies.

In other words, top-heavy plans are plans that have significant participation from owners and officers, to the point that most of the money in the plan is at the “top” of the company, belonging to these key company leaders as opposed to the rest of the employee base. It should also be noted that these ownership criteria are also applicable to family of owners, so any owners’ spouses and other immediate family members of owners will count as key employees themselves if they participate in the plan.

Plans are tested for this at the end of each year, and the tests are forward-looking. That way, employers who have top-heavy plans can be aware of their status as they enter into a new year, and make sure to take the necessary steps required of them. Employers can also choose to perform mid-year compliance testing to make sure their plan is on track, and most service providers offer this service for free.

Top-Heavy Impact on Small and Mid-Sized Businesses

It is rare to see the 401(k) plans of very large businesses being top-heavy, only because of the sheer number of employees who aren’t in management positions. For that reason, it’s small to mid-sized businesses that are most at risk of being top-heavy, with smaller teams being more likely to have a greater ratio of key employees to other employees participating in a plan.

There is nothing inherently wrong with being top-heavy, but the IRS requires top-heavy tests to make sure that no plan disproportionally benefits the key employees of a company. Since plans that are top-heavy are more at risk for this disproportional benefit, the IRS imposes certain contribution requirements to make sure that top-heavy employers are still benefitting the broader employee base under the plan appropriately.

If a plan is determined to be top-heavy, the employer will be required to make contributions to all regular employees in order to bring the plan back into balance. These contributions must be 3% of the employee’s salary, or match the highest contribution made by a key employee, whichever is lower. That means in some cases, a 1% contribution might be all it takes to correct a top-heavy plan issue.

The Solution: Safe Harbor

For those employers whose plans are determined to be top-heavy and require a 3% contribution to adjust, there is one solution that could automatically satisfy these minimum contribution requirements: adding safe harbor to the plan. Under a safe harbor plan, employers commit to making certain guaranteed contributions to all employees based on a standard rate or dollar amount. There are many ways to handle a safe harbor plan that may be right for different employers. One example would be for an employer to offer a 3% automatic contribution regardless of whether employees want to contribute or not. This effectively ensures that the plan will treat all employees equitably, which, in turn, makes it so even top-heavy plans are sure to satisfy any contribution requirements imposed by the IRS.

Safe Harbor: Pros and Cons


  • Helps to protect against top-heavy status
  • Generally exempts plans from compliance testing
  • Offers flexible setups, allowing employers to offer a 100% match on the first 3% of saved dollars and 50% on the next 2%, or a flat percentage match of an employee’s salary (100% match on the first 4% saved).
  • All safe harbor employer contributions are tax deductible


  • Employer contributions are fully-vested, so employees own them immediately
  • Employer contributions are automatically given to all employees, which may result in higher overall expense for employers
  • Safe harbor must be added to plans by October 1 of any year in order for the provisions to go into effect at the start of the next year

If your plan is top-heavy, or you’re concerned that it may be at risk of becoming so, it may be worth weighing the costs and the benefits of adding safe harbor to your plan. Combine the ease of management with the ability to give every eligible employee contributions to their 401(k), and it’s no wonder why so many employers choose safe harbor for their retirement plans.

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