Does Your Business Have a Top-Heavy 401(k)? Consider Adding Safe Harbor

What Does “Top-Heavy” Mean?

A 401(k) is top-heavy when most of the money in the plan belongs to company owners or high-earning leaders, called key employees.
Here’s who counts as a key employee:

• Owns 5% or more of the company
• Owns 1% or more and makes over $160,000
• Is an officer making over $230,000 (in 2025)

Even family members of owners can count as key employees if they’re in the plan.
If 60% or more of your 401(k) assets belong to these folks, your plan is considered top-heavy.

Why It Matters

The IRS wants retirement plans to be fair for everyone, not just the top earners. So if your plan is top-heavy, you may be required to give extra contributions to your regular employees, usually 3% of their salary.
That can be a surprise cost if you’re not prepared.

Who is Most at Risk?

Big companies usually don’t have to worry—they have lots of employees, so the plan is naturally balanced. But if you run a small or mid-sized business, it’s easier for your plan to tip toward being top-heavy. Fewer employees mean a few high-earners can own most of the plan’s value.

The Fix: Add a Safe Harbor

Here’s the good news: there’s a simple way to avoid top-heavy headaches—Safe Harbor.
A Safe Harbor 401(k) is a special type of plan where you, the employer, agree to make guaranteed contributions to your employees’ accounts. In return, the IRS gives you a break on testing rules, including top-heavy testing.

How Safe Harbor Works

You can set up Safe Harbor in a few ways:
3% nonelective contribution: You give every eligible employee 3% of their salary—no matter if they contribute or not.
Matching formula: You match 100% of the first 3% employees contribute, and 50% of the next 2%.
Either way, your plan stays compliant, and your team gets a boost toward retirement.

Pros of Safe Harbor

• Avoids top-heavy penalties
• Skips most IRS testing
• Tax-deductible contributions
• Flexible plan design

 Cons to Consider

• Contributions are immediately vested—employees own them right away
• You must give contributions to all eligible employees
• You need to set it up by October 1st  for it to count next year

If your 401(k) is—or might become—top-heavy, Safe Harbor could save you time, stress, and surprise costs. It’s a smart way to keep your plan fair, your team happy, and your business compliant. Check out our Safe Harbor Case Study to see a real-life example of adding a Safe Harbor to your retirement plan.

Need Help?

At Fisher\SMB, we help small businesses and nonprofits build retirement plans that work for everyone. If you’re unsure about your plan’s status or want to explore Safe Harbor, let’s talk.