IRS Publication 7002 – Employee benefit plans, such as 401(k)s and defined benefit pensions, must comply with strict IRS rules to maintain their tax-qualified status. One critical area is top-heavy requirements, outlined in Internal Revenue Code Section 416. These rules prevent plans from disproportionately benefiting highly compensated “key employees” at the expense of regular workers.
IRS Publication 7002, titled Employee Benefit Plans: Explanation No. 7 Top-Heavy Requirements (Rev. June 2021), provides detailed guidance on applying these rules during plan qualification reviews. Although the publication was last revised in 2021, the core requirements remain in effect, with annual cost-of-living adjustments (COLAs) updating dollar thresholds.
This article explains what a top-heavy plan is, how to determine top-heavy status, key compliance obligations (including minimum benefits and vesting), safe harbors, and the latest 2026 updates.
What Is a Top-Heavy Plan?
A plan is top-heavy if key employees hold more than 60% of the total accrued benefits or account balances.
- Defined contribution plans (e.g., 401(k)s, profit-sharing): The test compares the sum of account balances for key employees to the total for all employees (excluding former key employees).
- Defined benefit plans: The test uses the present value of accrued benefits for key employees versus all employees.
The test is performed as of the determination date (usually the last day of the prior plan year) using the most recent valuation date within the prior 12 months. Distributions within the prior year (or five years in certain pre-2002 cases) are added back, and adjustments are made for contributions due by the determination date.
Who Is a Key Employee?
Under Section 416(i), a key employee includes:
- An officer earning more than $235,000 in 2026 (up from $230,000 in 2025).
- A 5% owner of the employer.
- A 1% owner earning more than $150,000 (this threshold is not annually adjusted).
Compensation includes elective deferrals (e.g., 401(k), cafeteria plans). Former employees (including deceased) can still be key employees if they met the criteria during the relevant period.
Non-key employees are everyone else, including former key employees.
Determining Top-Heavy Status: Aggregation Rules
Many employers maintain multiple plans. Top-heavy testing requires aggregation:
- Required aggregation group: Includes all plans where a key employee participates (current or prior four years) and any plans needed to satisfy nondiscrimination (Section 401(a)(4)) or coverage (Section 410(b)) rules. If any plan in the group is top-heavy, all are.
- Permissive aggregation group: Adds other plans, but only if the full group satisfies nondiscrimination and coverage rules.
For controlled groups (under Sections 414(b), (c), or (m)), all related employers are treated as one.
Consequences of Being Top-Heavy
If a plan is top-heavy, it must provide special protections for non-key employees:
Minimum Contributions or Benefits
- Defined contribution plans: At least 3% of compensation (or the highest percentage allocated to any key employee if lower). Matching contributions count toward this minimum (post-2001).
- Defined benefit plans: An annual benefit of at least the lesser of 2% of average compensation (highest five consecutive years) times years of service, or 20%.
Minimums apply even if the employee has fewer than 1,000 hours or terminates employment, and cannot be integrated with Social Security.
Faster Vesting
Top-heavy plans must use accelerated vesting:
- 100% after 3 years, or
- Graded: 20% after 2 years, then 20% per year, reaching 100% after 6 years.
This applies to all benefits, including pre-top-heavy accruals. If the plan later ceases to be top-heavy, vesting may revert (subject to anti-cutback rules).
Safe Harbor Exemptions
Certain plans avoid top-heavy rules entirely:
- SIMPLE 401(k) plans with no other contributions.
- Safe harbor 401(k) plans providing required matching or nonelective contributions.
Other strategies include floor-offset arrangements or providing a 5% minimum in one plan to cover the group.
2026 Updates and Ongoing Compliance
The core top-heavy rules have remained stable since the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) changes. Annual COLAs adjust thresholds, such as the officer compensation limit rising to $235,000 for 2026.
Plan sponsors should:
- Perform annual top-heavy testing.
- Amend plans for any required minimums or vesting.
- Consult IRS checklists for retirement plan documents.
For the full text, download Publication 7002 at https://www.irs.gov/pub/irs-pdf/p7002.pdf.
Top-heavy compliance protects plan qualification and avoids penalties. If your plan covers key owners or executives, review it regularly—especially with 2026 limits in effect. Consult a qualified retirement plan professional for tailored advice.