The top-heavy test is an IRS requirement for all 401(k) plans. It checks whether key employees hold too large a share of plan assets and may require minimum contributions to non-key employees if the plan is top-heavy. This article explains how the test works, what triggers top-heavy status, and how to prevent or correct it.
The Internal Revenue Service (IRS) requires all 401(k) plans to undergo the top-heavy test after the end of each plan year. The test checks whether "key employees" hold more than 60% of total plan account balances. If they do, the plan is considered top-heavy, and non-key employees may be entitled to a minimum employer contribution.
Key employees are defined as:
An officer earning more than $235,000 in 2026.
An employee who owned more than 5% of the business during the current plan year.
An employee who owned more than 1% of the business and earned over $150,000 during the current plan year.
Note: Family attribution rules may apply. An employee who is the spouse, parent, child, or grandparent of someone with more than 1% ownership and earnings over $150,000 for the plan year may also be considered a key employee. Learn more about ownership and family attribution.
Top-heavy contributions can be among the costliest of testing contributions. Having a clear picture of this test and how it may affect your business is important.
Top-heavy testing compares key employee account balances to total plan assets as of the determination date:
First-year plans: The last day of the first plan year. Contributions made for the first plan year but not yet allocated as of Dec. 31 are also included.
All subsequent years: The last day of the prior plan year (Dec. 31 for calendar-year plans).
Plan balances are adjusted to exclude unrelated rollovers and most balances of terminated employees, but they do include loans and early distributions.
If your plan consists entirely of key employees, it will automatically exceed the top-heavy limit. Because there are no non-key employees, no minimum contributions are required for that year. However, if a non-key employee joins the plan in a future year, they may need to get top-heavy contributions once eligible.
If you plan to hire non-key employees, consider setting a 12-month service requirement to delay eligibility and keep them out of the top-heavy determination for the current year.
If your entity type allows owners or key employees to make owner contributions, late or year-end contributions can significantly push the top-heavy ratio above 60%. Even if your plan has been passing throughout the year, a large year-end owner contribution could change that — and Gusto Retirement cannot monitor or detect unexpected owner contributions.
Pro tip: Owners should contribute consistently throughout the year, monitor non-key employee deferral rates, and adjust their own contributions accordingly.
Plans that join Gusto Retirement late in the year, or those expecting large year-end contributions like bonuses, have less time for preventive action and face higher top-heavy risk.
Pro tip: Contribute consistently throughout the year, consider starting your plan earlier, or make contributions to employees to reduce top-heavy risk.
Small businesses with many owners relative to other employees are especially at risk. A large number of key employees can push results past the 60% threshold, and staffing changes can significantly affect outcomes. Keep ownership information up to date in Gusto Retirement.
If your plan is top-heavy, you may be required to make a top-heavy minimum contribution (THMC) to all non-key employees employed on the last day of the plan year.
The THMC for each non-key employee is the lesser of:
3% of total annual compensation, or
The highest contribution percentage received by any key employee (including elective deferrals that are not catch-up contributions, plus any employer contributions).
The THMC can be satisfied using employer matching contributions, profit-sharing contributions, safe harbor contributions, or Qualified Non-Elective Contributions (QNECs).
Important: Elective deferrals count toward determining the highest key employee contribution percentage but do not count toward satisfying the non-key employee minimum. Top-heavy contributions may also be subject to a vesting schedule.
Top-heavy status is determined based on account balances as of Dec. 31 of the prior year. For example, top-heavy status for 2026 is based on balances as of Dec. 31, 2025.
Because employer contributions for a given plan year (like profit sharing) are typically made after that year ends, they do not affect the top-heavy determination for the following year. For example, profit sharing contributed in March 2026 for the 2025 plan year does not change the Dec. 31, 2025, top-heavy determination.
The first plan year has two important differences:
Contributions made in the following year for the first plan year are included in the top-heavy determination as of Dec. 31 of the first plan year.
The top-heavy status determined for the first plan year applies to both the first and second plan years.
For example, if a plan started in 2025 and a profit-sharing contribution was made on Mar. 15, 2026, for the 2025 plan year, that contribution is included in the top-heavy determination as of Dec. 31, 2025. This means some first-year plans may be able to use additional contributions to avoid top-heavy status in both the first and second years.
Some first-year plans that would otherwise owe top-heavy minimum contributions may be able to avoid this by making a profit-sharing contribution. This option only applies to first-year plans — profit sharing cannot fix top-heavy status after the first plan year.
A few things to consider:
Fixing top-heavy status with profit sharing is typically more expensive than a THMC because profit sharing goes to all participants, while the THMC goes only to non-key employees.
The full THMC needed to fix top-heavy status for the second year will not be known until the end of that year, since it depends on non-key employee compensation and employer contributions throughout the year.
Because the THMC applies only to non-key employees, you may want to consider a contribution that key employees can also benefit from — one that eliminates the risk of a required THMC the following year.
The examples below cover two common profit-sharing formulas:
Pro rata (comp-to-comp): all participants get the same percentage of their compensation.
Flat dollar: all participants get the same dollar amount.
If your plan is top-heavy by the determination date, you are required to make a THMC to all non-key employees who are employed on the last day of the plan year.
Before Gusto Retirement can calculate these contributions, you need to verify your team's data using the task on your 401(k) administrator dashboard.
Confirm key employees: At the start of the year, open the dashboard task to verify that all key employees — including officers, owners, and their spouses or children — are accurately identified.
Verify compensation: Make sure we have your team's finalized compensation by looking out for a second task to collect any missing data.
Update employee statuses: Go to your Roster tab to make sure all employee statuses (active or terminated) are up to date.
Once you confirm this information, Gusto Retirement will automatically calculate the required THMC for each eligible non-key employee.
Safe harbor plans generally exempt employers from making top-heavy minimum contributions, as long as no additional employer contributions beyond safe harbor contributions are made. Safe harbor plans are also exempt from ADP and ACP testing.
Keep the following timing in mind:
Matching contributions: Must be added at least 30 days before the start of the plan year.
Nonelective contributions: Can be added mid-year or retroactively, as long as the contribution applies to the full plan year.
Begin the safe harbor process before Nov. 1 to allow time for amending plan documents and sending required participant notices.
Gusto Retirement is a 401(k) plan administrator and, along with Gusto, does not provide legal or tax advice. Employers should work with qualified legal and tax advisors to understand the implications of any retirement plan decisions.