What is the relationship between the top-heavy minimum contribution and the highest allocation rate of key employees?

The top-heavy minimum contribution is designed to ensure that key employees, who may receive disproportionately higher benefits under a 401(k) plan, do not overshadow the benefits provided to non-key employees. According to IRS regulations, when a plan is deemed top-heavy, the employer is required to make minimum contributions to non-key employee accounts to balance out the disparities.

Specifically, the top-heavy minimum contribution must be at least equal to the lesser of 3% of the participant’s compensation or the highest contribution rate allocated to key employees for that year. This rule ensures that non-key employees receive a minimum level of contribution which is not less than what is provided to the key employees, thus promoting fairness and compliance with regulations.

This concept emphasizes the balance needed within retirement plan contributions, particularly in top-heavy situations, where key employees cannot exclusively benefit from the plan. Understanding this relationship is crucial for maintaining compliance and promoting equitable benefits across all employee levels within the organization.