![]() More info can be found in this article HERE. If at the end of the year the total 401(k) plan balance (everyone) has over 60% from these key employees (executives, owners, etc.), then the plan fails the Top Heavy test and would have to make a contribution up to 3% to all non-key employees (this could even include some of those highly compensated employees) in any year afterward that those key employees make contributions. The Top Heavy test looks at those “key” employees, which are your executives and owners. It isn’t exactly this cut-and-dry, but I think you should know that possible refund or mandatory contribution is required if this test is failed. OR you can make an employer contribution to all employees that are not highly compensated. ![]() The result? There would need to be a refund of some (perhaps all) contributions made by those highly compensated employees (this includes owners regardless of pay). The 2% threshold would mean the highly paid and ownership group couldn’t exceed 6% for their average. If the average of the highly paid employees and/or owners is 8%, while those staff employees is 4%, the plan would fail this test. If the participation from the highly compensated employees exceeds a certain percentage of those staff employees, we’ll say by 2%, this test will fail. This test then compares the average contribution by these highly paid individuals to those that don’t fit that criteria (we’ll refer to those as “staff employees”). The ADP/ACP looks at all those highly compensated employees (anyone that earned over $125,000 in 2019 would be considered highly compensated) and/or has over 5% ownership in the company. I’ll only provide a short summary here for these tests to give you perspective.ĪDP/ACP – Average Employee Deferrals/Employer Contributions
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