What is the top-heavy minimum contribution due to all non-key employees based on?

The correct answer is based on the specific regulatory requirements surrounding top-heavy plans. In a top-heavy 401(k) plan, the minimum contribution for non-key employees is established to ensure that non-key employees receive a fair share of benefits compared to key employees.

The top-heavy minimum contribution is computed as the lesser of the two percentages: the contribution rate set for key employees or the highest allocation rate among non-key employees. This means that if key employee contributions are higher, the minimum contribution made for non-key employees will not exceed this rate, creating a balance between contributions for key and non-key employees under the plan.

This alignment of contributions is intended to provide equitable treatment in retirement savings while also ensuring that non-key employees benefit appropriately from the plan, fulfilling the requirements laid out by the IRS in the context of top-heavy plans. By using the lesser of the key employee allocation rates, it helps maintain the focus on benefiting non-key employees, preventing potential discrimination in favor of key employees.