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 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 must adopt specific policies, such as faster vesting and certain minimum benefits for employees who are not owners or officers. These policies ensure that rank-and-file workers receive some benefit from the tax preferences that the employer enjoys because of the plan.

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. That is, by using certain structures and procedures the plan is deemed to be non-discriminatory. For example, 401(k) plans that adopt automatic enrollment provisions can satisfy the nondiscrimination rules if they provide a specified minimum benefit or a matching contribution.


Ensuring equity

Policymakers should maintain and strengthen top-heavy rules so that benefits are distributed equitably among plan participants.

Use of 401(k) safe harbors A provision of a statute or a regulation that reduces or eliminates a party's liability on the condition that the party is in compliance with defined standards. should be assessed to ensure broad plan participation by lower-paid employees.