Employee Plans Learn, Educate, Self-Correct and Enforce Project - Top-Heavy 401(k) Plans


We examined approximately 50 Form 5500 returns of 401(k) plans that:

  • covered from three to eight participants, and
  • were expected to have employee deferrals and to be top-heavy.

Project Results:

The most common issues were:

  • Not having adequate fidelity bonding:
    • Plans with more than one participant generally must have a fidelity bond in the amount of ten percent of the trust:
      • minimum bonding = $1,000, and
      • maximum bonding = $500,000.
    • Correction involved the plan administrator securing the necessary bonding for plan fiduciaries.
  • Not meeting the top-heavy minimum contribution requirements by:
    • Failing to test for top-heaviness and consequently not making the required minimum contribution
    • Not providing the top-heavy allocation to an eligible employee, or
    • Not following the plan terms and consequently failing to provide the full minimum top-heavy contribution to non-key employees because of:
  • Excluding an eligible employee resulting in:
    • Failing to allow these employee(s) to make elective deferrals (and if applicable, the related match), and
    • Failing to make the required minimum top-heavy contribution
  • Not depositing elective deferrals timely
  • Not distributing excess contributions timely
  • Not providing the required contribution for eligible employees in a safe harbor 401(k) plan

Avoiding the Error:

Talk with your plan administrator or pension professional to determine if you are testing the plan for top-heaviness each year. If your plan is top-heavy, then ensure that:

  • all eligible participants are properly identified, and
  • you follow the plan terms relating to accelerated vesting and minimum contributions or benefits required for top-heavy plans.

Ensure that you are aware of your specific plan terms and you are following them in the daily operations of your plan.

Setting up operating procedures and appropriate internal controls for the plan is an important step. One of these procedures should include an annual review of your fidelity bonding compared to the value of the trust assets. If you need help, a benefits professional can assist you with setting up a system that works for you and your retirement plan.

If an operational review of your plan discloses qualification failures, the Employee Plans Compliance Resolution System (EPCRS) offers a way to correct most plan errors.