Top-Heavy and Nondiscrimination Rules


To maintain their tax-advantaged status, retirement plans must demonstrate that they are equitable and inclusive. Plans are subject to both “top-heavy” and nondiscrimination rules.

Top-heavy rules apply to owner-dominated firms. A plan is considered top-heavy when the value of benefits for the owners and officers of the business exceeds 60 percent of the value of benefits for all other employees. Plans that are top-heavy are required to adopt specific policies, such as faster vesting and certain minimum benefits for employees who are not owners or officers, to ensure that rank-and-file workers receive some benefit from the tax preferences that the employer enjoys because of the plan.

The top-heavy rules have increased benefits for some of the most vulnerable covered employees. The rules are of particular help to women, who tend to earn less and change jobs more frequently than men. The Economic Growth and Tax Relief Reconciliation Act of 2001, however, weakened some of the important top-heavy protections for retirement plans.

Plans must also demonstrate that they do not discriminate in favor of highly compensated employees. To satisfy this requirement, plans can either perform certain tests or follow one of several “safe-harbor” rules, which require certain plan structures. For example, 401(k) plans that adopt automatic enrollment provisions can satisfy the nondiscrimination rules through a safe harbor if they provide a specified minimum benefit or a matching contribution.

Top-Heavy and Nondiscrimination Rules: Policy

Ensuring equity

In this policy: Federal

AARP supports maintaining and strengthening top-heavy rules so that benefits are distributed equitably among plan participants.

Use of 401(k) safe harbors should be assessed to ensure broad plan participation by lower-paid employees.