June 10, 2025 | 4-5 Minute Read
SECURE 2.0 provides a new optional tool for sponsors of 401(k) and Profit Sharing plans in the annual Top-Heavy test by extending similar relief that has been offered in the Actual Deferral Percentage (ADP)/Actual Contribution Percentage (ACP) tests and coverage tests for “Otherwise Excludable” Employees. Please note that generally 403(b) and 457 plans are not typically subject to the Top-Heavy test.
When it Becomes Effective
This SECURE 2.0 optional provision became effective for plan years starting after December 31, 2023.
How it Works
Whether you are an expert in the qualified retirement plan industry or new to it, this change is a lot to digest, so let’s break it down a bit.
First, the Top-Heavy test is run annually at the end of the plan year and looks at the ratio between the account balance of Key Employees (generally employees who own greater than 5% of the company, employees who have more than a 1% ownership in the company and earn over a certain threshold, and officers who earn over a certain threshold) and the non-Key Employees (all of the other employees eligible to contribute or receive a contribution in the retirement plan). If this ratio indicates that Key Employees have more than 60% of the total balances in the plan, the plan is considered Top-Heavy and an additional 3% of annual compensation non-elective contribution may be required for the employer to make to each eligible employee’s account.
Second, the IRS has set the maximum age and service requirements to be eligible to participate in 401(k) and Profit Sharing plans of age 21 and one year of service in which the employee must work at least 1,000 hours. The IRS requires that employees must be allowed entry into a qualified plan to at least the first day of the first month of plan year and the first day of the seventh month of the plan year (semi-annually). So what happens if an employer is more generous in its plan provisions for age, service, and plan entry? This is where “Otherwise Excludable” employees come into play. An Otherwise Excludable employee is one who is able to participate in the retirement plan prior to meeting the IRS’s maximum age, service, and/or entry requirements.
There are benefits for the plan sponsor for their generosity in lowering the bar for employees to participate in the retirement plan. In the case of the Top-Heavy test, plan sponsors may now opt to run two separate Top-Heavy tests – one for the non-excludable group (those employees who met the IRS’s maximum age, service, and entry requirements) and one for the Otherwise Excludable employees.
The benefits of this separate testing can lead to plans passing the Top-Heavy test that they would previously have not passed or fewer employees needing a required Non-Elective Contribution. The two tests are handled independently, so if one of the two Top-Heavy tests fails (60% or more of the account balances belong to Key Employees), the number of participants needing a Non-Elective Contribution is limited to those included in the failed test.
Other Considerations
Here are a few items that plan sponsors should be aware of in regard to this new option:
- This is an optional plan feature, and the plan must be amended to allow for these withdrawals. Plans intending to adopt this provision can offer this feature now, but the amendment will need to happen by the end of the remedial amendment period (the end of 2026 for non-governmental plans and 2029 for governmental plans).
- Participants will need to receive communications of this added provision, through the distribution of the Summary of Material Modifications and Summary Plan Description. Your document provider can supply these documents for distribution.
- Plans that have felt they needed to elect the IRS maximum age, service, and entry requirements for of fear of failing the Top-Heavy test or needing to reduce the number of participants who would receive a Top-Heavy contribution, may be able to use this new option to allow employees into the plan sooner without significantly increasing employer costs.
Benefits² Administrators clients: Your dedicated Retirement Analyst help you determine if your plan document will need to be amended to allow this provision. Once elected, your Retirement Analyst has your back! When conducting the annual Top-Heavy Test, your Retirement Analyst will select the Top-Heavy testing option that best benefits your plan by either helping the plan to pass or reducing the Top-Heavy contribution due to employees.
For non-clients or plan advisors seeking guidance: Feel free to contact Leslie Wood (lwood@benefits2llc.com) for additional information and support. Leslie can provide an overview of the SECURE 2.0 Top Heavy testing relief for Otherwise Excludable employees, if a plan document needs amended for this provision, or additional strategies for increased retirement savings.
Whether you are a current client or not, our goal at Benefits² Administrators is to support every plan sponsor with cost effective and easy to administer solutions to help their employees prepare for retirement.
JP Perryman, QKA
Jeremiah “JP” Perryman, QKA is the Compliance and Operations Manager at Benefits² Administrators. He has more than 15 years of experience working with qualified retirement plans.