TOP-HEAVY — Publication 6165 — Defined Benefit Listing

Statement of Requirement: IRC 416; Notice 2001-56; Notice 2001-57; Rev. Proc. 2023-37, 9.02(3) and 9.02(5)

Document Provision: _____

(Note to reviewer: A plan that is designed to operate as if it were always top-heavy (deemed top-heavy plan) need not contain the following paragraph or the other provisions of this LRM #69. A deemed top-heavy plan contains a single benefit structure that satisfies

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the requirements of IRC 416(b) and (c) for each plan year without regard to whether the plan is top-heavy.)

Sample Plan Language:

Section(s) _____ will apply for purposes of determining whether the plan is a top-heavy plan under IRC 416(g), and whether the plan satisfies the minimum benefits requirements of IRC 416(c) for such years. If the plan is top-heavy in a plan year, the provisions of section(s) _____ will supersede any conflicting provisions in the plan or adoption agreement.

(Note to reviewer: The blanks should be filled in with the section numbers that correspond to the requirements of LRMs #69-73.)

(a) Key employee: Key employee means any employee or former employee (including any deceased employee) who at any time during the plan year that includes the determination date is an officer of the employer having an annual compensation greater than $130,000 (as adjusted under IRC 416(i)(1), a 5-percent owner of the employer, or a 1-percent owner of the employer having an annual compensation of more than $150,000. For purposes of this paragraph (a), annual compensation means compensation within the meaning of section _______ of the plan and related elections in the adoption agreement.

(Note to reviewer: The blank should be filled in with the section of the plan that corresponds to section 6.2 of LRM #40.)

The determination of who is a key employee will be made in accordance with IRC 416(i) (1) and the regulations thereunder.

(b) Top-heavy plan: For any plan year beginning after December 31, 1983, this plan is topheavy if any of the following conditions exists:

(i) If the top-heavy ratio for this plan exceeds 60 percent and this plan is not part of any required aggregation group or permissive aggregation group of plans.

(ii) If this plan is a part of a required aggregation group of plans but not part of a

permissive aggregation group and the top-heavy ratio for the group of plans exceeds 60 percent.

(iii) If this plan is a part of a required aggregation group and part of a permissive

aggregation group of plans and the top-heavy ratio for the permissive aggregation group exceeds 60 percent.

(i) If the employer maintains one or more defined benefit plans and the employer has not maintained any defined contribution plan (including any simplified employee pension, as defined in IRC 408(k)) which during the 5-year period ending on the determination date(s) has or has had account balances, the top-heavy ratio for this plan alone or for the required or permissive aggregation group as appropriate is a fraction, the numerator of which is the sum of the present value of accrued benefits of all key employees as of the determination date(s) (including any part of any accrued benefit distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for

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a reason other than severance from employment, death or disability), and the denominator of which is the sum of the present value of accrued benefits of all employees as of the determination date(s) (including any part of any accrued benefits distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability), determined in accordance with IRC 416 and regulations thereunder.

(ii) If the employer maintains one or more defined benefit plans and the employer

maintains or has maintained one or more defined contribution plans (including any simplified employee pension) which during the 5-year period ending on the determination date(s) has or has had any account balances, the top-heavy ratio for any required or permissive aggregation group as appropriate is a fraction, the numerator of which is the sum of the present value of accrued benefits under the aggregated defined benefit plan or plans for all key employees, determined in accordance with (i) above, and the sum of account balances under the aggregated defined contribution plan or plans for all key employees as of the determination date(s), and the denominator of which is the sum of the present value of accrued benefits under the defined benefit plan or plans for all participants, determined in accordance with (i) above, and the account balances under the aggregated defined contribution plan or plans for all participants as of the determination date(s), all determined in accordance with IRC 416 and regulations thereunder. The account balances in a defined contribution plan in both the numerator and denominator of the top-heavy ratio are increased for any distribution of an account balance made in the 1-year period ending on the determination date (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability).

(iii) For purposes of (i) and (ii) above the value of account balances and the present value

of accrued benefits will be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the determination date, except as provided in IRC 416 and regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a participant (1) who is not a key employee but who was a key employee in a prior year, or (2) who has not been credited with at least one hour of service with any employer maintaining the plan at any time during the 1-year period ending on the determination date will be disregarded. The calculation of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with IRC 416 and regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the determination dates that fall within the same calendar year.

The accrued benefit of a participant other than a key employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under

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the fractional rule of IRC 411(b)(1)(C).

(d) Permissive aggregation group: The required aggregation group of plans plus any other plan or plans of the employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of IRC 401(a)(4) and IRC 410.

(e) Required aggregation group: (l) Each qualified plan of the employer in which at least one key employee participates or participated at any time during the plan year containing the determination date or any of the four preceding plan years (regardless of whether the plan has terminated), and (2) any other qualified plan of the employer which enables a plan described in (l) to meet the requirements of IRC 401(a)(4) or IRC 410.

(f) Determination date: For any plan year subsequent to the first plan year, the last day of the preceding plan year. For the first plan year of the plan, the last day of that year.

(g) Valuation date: The date elected by the employer in section _____ of the adoption agreement as of which account balances or accrued benefits are valued for purposes of calculating the top-heavy ratio.

(h) Present value: Present value shall be based only on the interest and mortality rates specified in the adoption agreement.

Sample Adoption Agreement Language:

A. Present value: For purposes of establishing present value to compute the top-heavy

ratio, any benefit shall be discounted only for mortality and interest based on the following:

Interest rate: _____%

Mortality table: _____

Valuation date: For purposes of computing the top-heavy ratio, the valuation date shall be ___________ of each year.