Special Rules for Top-Heavy Plans

Special rules apply to top-heavy plans--that is, plans in which key employees account for more than 60 percent of total accrued benefits. Key employees are generally defined as top officers, owners, and employees who earn $135,000 or more per year.

The top-heavy rules, which were designed to redistribute benefits toward nonkey employees, require faster vesting (either three-year cliff or six-year graded) and establish mandatory minimum benefits or contributions for nonkey employees. For defined-benefit plans, the minimum benefit is calculated using an earnings-and-length-of-service formula. An employee's average salary, a key component under that formula, is calculated by using the five years of highest earnings; the benefit paid per year of service can be no less than 2 percent of that average salary. However, only 10 years of service must be counted. For defined-contribution plans, the minimum contribution is the lesser of 3 percent of a nonkey employee's compensation or the percentage of compensation contributed to the key employee with the largest percentage contribution.