Top-Heavy Rules, Vesting, and Nondiscrimination Concepts
Top-heavy rules
A defined contribution plan is top-heavy if key employees' account balances exceed 60% of total balances, measured on the determination date (generally the last day of the preceding plan year). Key employees under IRC 416(i) are officers earning above the indexed threshold ($230,000 in 2025, limited to the lesser of 50 officers or 10% of employees, minimum three), more than 5% owners, and more than 1% owners earning above $160,000 (2025). A top-heavy plan must provide a minimum contribution of 3% of compensation to non-key employees (5% in a DB plan, or 2% per year of service up to 20%), and vesting must be at least as favorable as a 3-year cliff or 6-year graded schedule. Safe harbor 401(k) plans consisting solely of deferrals and safe harbor contributions are exempt.
Vesting
IRC 411 sets minimum vesting for employer contributions in DC plans under the primary schedules (3-year cliff or 6-year graded, 2-6), with a 2-year cliff available in narrower circumstances after SECURE 2.0. Elective deferrals are always 100% vested.
Nondiscrimination concepts
401(a)(4) prohibits discrimination in contributions, benefits, and benefits, rights, and features; 414(s) defines compensation; permitted disparity allows a limited extra benefit above the Social Security wage base. Benefits, rights, and features must be currently and effectively available to a nondiscriminatory group.
Traps
Exactly 60% is not top-heavy - the test is exceeds 60%. Former key employees' balances are excluded from the ratio, though the individual may still be a key employee for other purposes. The top-heavy minimum must be an employer contribution; elective deferrals cannot satisfy it.
Worked example: key employees hold $900,000 of $1,500,000 in total balances - exactly 60%, so no top-heavy minimum is required for that year.