401(k) Rescue, the Ekon Benefits 401(k) Fix-It Series, describes the most common 401(k) mistakes as determined by the IRS. We provide explanations of common mistakes, suggested prevention techniques and recommendations on correction methods.

Common Mistake #11: The Plan Was Top-Heavy, but No Minimum Contributions Were Made

A 401(k) plan is considered top-heavy if, as of the last day of the previous plan year, the value of key employees’ accounts exceeds 60% of the total plan assets. Key employees include those who meet at least one of the following criteria during the plan year:

• An officer earning more than $220,000 (for 2024; this threshold is adjusted annually).
• An employee who owns more than 5% of the business (regardless of compensation).
• An employee who owns more than 1% of the business and earns over $150,000 during the plan year.

Any employee who doesn’t meet these criteria is considered a non-key employee. Family attribution rules also apply when determining ownership. For example, a spouse, parent, child, or grandparent of a more-than-5% owner is also treated as owning that interest and may be considered a key employee under IRS attribution rules.

If the plan is deemed top-heavy, the employer must make a minimum non-elective contribution of 3% of annual compensation to each non-key employee who is employed on the last day of the plan year. If a plan is top-heavy and the minimum contribution is not made, the employer must correct the error by making the required contribution along with any lost earnings.

How to Correct Top-Heavy Errors

Corrections can typically be made through the IRS Self-Correction Program (SCP) if discovered and fixed within three years. Otherwise, a Voluntary Correction Program (VCP) submission may be required under EPCRS.

Preventing This Error

To prevent this error, top-heavy testing should be performed annually, ensuring key and non-key employees are properly identified.

For a complete listing of the most common 401(k) mistakes, please visit the IRS 401(k) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.