(1) the vesting requirements of subsection (b), and
(2) the minimum benefit requirements of subsection (c).
(1) In general
A plan satisfies the requirements of this subsection if it satisfies the requirements of either of the following subparagraphs:
(A) 3-year vesting
A plan satisfies the requirements of this subparagraph if an employee who has completed at least 3 years of service with the employer or employers maintaining the plan has a nonforfeitable right to 100 percent of his accrued benefit derived from employer contributions.
(B) 6-year graded vesting
A plan satisfies the requirements of this subparagraph if an employee has a nonforfeitable right to a percentage of his accrued benefit derived from employer contributions determined under the following table:
Years of service | The nonforfeitable percentage is: |
---|---|
2 | 20 |
3 | 40 |
4 | 60 |
5 | 80 |
6 or more | 100 |
(2) Certain rules made applicable
Except to the extent inconsistent with the provisions of this subsection, the rules of section 411 shall apply for purposes of this subsection.
(1) Defined benefit plans
(A) In general
A defined benefit plan meets the requirements of this subsection if the accrued benefit derived from employer contributions of each participant who is a non-key employee, when expressed as an annual retirement benefit, is not less than the applicable percentage of the participant’s average compensation for years in the testing period.
(B) Applicable percentage
For purposes of subparagraph (A), the term “applicable percentage” means the lesser of—
(i) 2 percent multiplied by the number of years of service with the employer, or
(ii) 20 percent.
(C) Years of service
For purposes of this paragraph—
(i) In general
Except as provided in clause (ii) or (iii), years of service shall be determined under the rules of paragraphs (4), (5), and (6) of .
(ii) Exception for years during which plan was not top-heavy
(I) the plan was not a top-heavy plan for any plan year ending during such year of service, or
(II) such year of service was completed in a plan year beginning before
(iii) Exception for plan under which no key employee (or former key employee) benefits for plan year
For purposes of determining an employee’s years of service with the employer, any service with the employer shall be disregarded to the extent that such service occurs during a plan year when the plan benefits (within the meaning of ) no key employee or former key employee.
(D) Average compensation for high 5 years
For purposes of this paragraph—
(i) In general
A participant’s testing period shall be the period of consecutive years (not exceeding 5) during which the participant had the greatest aggregate compensation from the employer.
(ii) Year must be included in year of service
The years taken into account under clause (i) shall be properly adjusted for years not included in a year of service.
(iii) Certain years not taken into account
(I) such year ends in a plan year beginning before
(II) such year begins after the close of the last year in which the plan was a top-heavy plan.
(E) Annual retirement benefit
For purposes of this paragraph, the term “annual retirement benefit” means a benefit payable annually in the form of a single life annuity (with no ancillary benefits) beginning at the normal retirement age under the plan.
(2) Defined contribution plans
(A) In general
A defined contribution plan meets the requirements of the subsection if the employer contribution for the year for each participant who is a non-key employee is not less than 3 percent of such participant’s compensation (within the meaning of section 415). Employer matching contributions (as defined in ) shall be taken into account for purposes of this subparagraph (and any reduction under this sentence shall not be taken into account in determining whether applies).
(B) Special rule where maximum contribution less than 3 percent
(i) In general
The percentage referred to in subparagraph (A) for any year shall not exceed the percentage at which contributions are made (or required to be made) under the plan for the year for the key employee for whom such percentage is the highest for the year.
(ii) Treatment of aggregation groups
(I) For purposes of this subparagraph, all defined contribution plans required to be included in an aggregation group under subsection (g)(2)(A)(i) shall be treated as one plan.
(II) This subparagraph shall not apply to any plan required to be included in an aggregation group if such plan enables a defined benefit plan required to be included in such group to meet the requirements of or 410.
(C) Application to employees not meeting age and service requirements
Any employees not meeting the age or service requirements of (without regard to subparagraph (B) thereof) may be excluded from consideration in determining whether any plan of the employer meets the requirements of subparagraphs (A) and (B).
A top-heavy plan shall not be treated as meeting the requirement of subsection (b) or (c) unless such plan meets such requirement without taking into account contributions or benefits under chapter 2 (relating to tax on self-employment income), chapter 21 (relating to Federal Insurance Contributions Act), title II of the Social Security Act, or any other Federal or State law.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section where the employer has 2 or more plans including (but not limited to) regulations to prevent inappropriate omissions or required duplication of minimum benefits or contributions.
(1) In general
(A) Plans not required to be aggregated
Except as provided in subparagraph (B), the term “top-heavy plan” means, with respect to any plan year—
(i) any defined benefit plan if, as of the determination date, the present value of the cumulative accrued benefits under the plan for key employees exceeds 60 percent of the present value of the cumulative accrued benefits under the plan for all employees, and
(ii) any defined contribution plan if, as of the determination date, the aggregate of the accounts of key employees under the plan exceeds 60 percent of the aggregate of the accounts of all employees under such plan.
(B) Aggregated plans
Each plan of an employer required to be included in an aggregation group shall be treated as a top-heavy plan if such group is a top-heavy group.
(2) Aggregation
For purposes of this subsection—
(A) Aggregation group
(i) Required aggregation
(I) each plan of the employer in which a key employee is a participant, and
(II) each other plan of the employer which enables any plan described in subclause (I) to meet the requirements of or 410.
(ii) Permissive aggregation
The employer may treat any plan not required to be included in an aggregation group under clause (i) as being part of such group if such group would continue to meet the requirements of sections 401(a)(4) and 410 with such plan being taken into account.
(B) Top-heavy group
The term “top-heavy group” means any aggregation group if—
(i) the sum (as of the determination date) of—
the sum (as of the determination date) of—
(I) the present value of the cumulative accrued benefits for key employees under all defined benefit plans included in such group, and
(II) the aggregate of the accounts of key employees under all defined contribution plans included in such group,
(ii) exceeds 60 percent of a similar sum determined for all employees.
(3) Distributions during last year before determination date taken into account
(A) In general
For purposes of determining—
(i) the present value of the cumulative accrued benefit for any employee, or
(ii) the amount of the account of any employee,
(B) 5-year period in case of in-service distribution
In the case of any distribution made for a reason other than severance from employment, death, or disability, subparagraph (A) shall be applied by substituting “5-year period” for “1-year period”.
(4) Other special rules
For purposes of this subsection—
(A) Rollover contributions to plan not taken into account
Except to the extent provided in regulations, any rollover contribution (or similar transfer) initiated by the employee and made after
(B) Benefits not taken into account if employee ceases to be key employee
If any individual is a non-key employee with respect to any plan for any plan year, but such individual was a key employee with respect to such plan for any prior plan year, any accrued benefit for such employee (and the account of such employee) shall not be taken into account.
(C) Determination date
The term “determination date” means, with respect to any plan year—
(i) the last day of the preceding plan year, or
(ii) in the case of the first plan year of any plan, the last day of such plan year.
(D) Years
To the extent provided in regulations, this section shall be applied on the basis of any year specified in such regulations in lieu of plan years.
(E) Benefits not taken into account if employee not employed for last year before determination date
If any individual has not performed services for the employer maintaining the plan at any time during the 1-year period ending on the determination date, any accrued benefit for such individual (and the account of such individual) shall not be taken into account.
(F) Accrued benefits treated as accruing ratably
The accrued benefit of any employee (other than a key employee) shall be determined—
(i) under the method which is used for accrual purposes for all plans of the employer, or
(ii) if there is no method described in clause (i), as if such benefit accrued not more rapidly than the slowest accrual rate permitted under .
(G) Simple retirement accounts
The term “top-heavy plan” shall not include a simple retirement account under .
(H) Cash or deferred arrangements or plans using alternative methods of meeting nondiscrimination requirements
The term “top-heavy plan” shall not include a plan which consists solely of—
(i) a cash or deferred arrangement which meets the requirements of or 401(k)(13)and matching contributions with respect to which the requirements of paragraph (11), (12), or (13) of are met, or
(ii) a starter 401(k) deferral-only arrangement described in or a safe harbor deferral-only plan described in .
(1) Key employee
(A) In general
The term “key employee” means an employee who, at any time during the plan year, is—
(i) an officer of the employer having an annual compensation greater than $130,000,
(ii) a 5-percent owner of the employer, or
(iii) a 1-percent owner of the employer having an annual compensation from the employer of more than $150,000.
(B) Percentage owners
(i) 5-percent owner
(I) if the employer is a corporation, any person who owns (or is considered as owning within the meaning of section 318) more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation, or
(II) if the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer.
(ii) 1-percent owner
For purposes of this paragraph, the term “1-percent owner” means any person who would be described in clause (i) if “1 percent” were substituted for “5 percent” each place it appears in clause (i).
(iii) Constructive ownership rules
(I) subparagraph (C) of shall be applied by substituting “5 percent” for “50 percent”, and
(II) in the case of any employer which is not a corporation, ownership in such employer shall be determined in accordance with regulations prescribed by the Secretary which shall be based on principles similar to the principles of section 318 (as modified by subclause (I)).
(C) Aggregation rules do not apply for purposes of determining ownership in the employer
The rules of subsections (b), (c), and (m) of section 414 shall not apply for purposes of determining ownership in the employer.
(D) Compensation
For purposes of this paragraph, the term “compensation” has the meaning given such term by .
(2) Non-key employee
The term “non-key employee” means any employee who is not a key employee.
(3) Self-employed individuals
In the case of a self-employed individual described in section 401(c)(1)—
(A) such individual shall be treated as an employee, and
(B) such individual’s earned income (within the meaning of ) shall be treated as compensation.
(4) Treatment of employees covered by collective bargaining agreements
The requirements of subsections (b), (c), and (d) shall not apply with respect to any employee included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and 1 or more employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers.
(5) Treatment of beneficiaries
The terms “employee” and “key employee” include their beneficiaries.
(6) Treatment of simplified employee pensions
(A) Treatment as defined contribution plans
A simplified employee pension shall be treated as a defined contribution plan.
(B) Election to have determinations based on employer contributions
In the case of a simplified employee pension, at the election of the employer, paragraphs (1)(A)(ii) and (2)(B) of subsection (g) shall be applied by taking into account aggregate employer contributions in lieu of the aggregate of the accounts of employees.