What is a top-heavy defined contribution plan and how does it apply to a SARSEP?
A SARSEP is top-heavy for a year when more than 60 percent of all employer contributions, including employee elective deferrals, go to key employees as determined at the end of the preceding year. But since many SARSEPs are always top-heavy, SARSEPs are often drafted to operate as if they were always top-heavy, thereby eliminating the need to make the annual 60 percent determination. Top-heavy plans are subject to additional requirements. The employer will satisfy the top-heavy requirements by making a minimum contribution each year to the SEP-IRA of each employee eligible to participate in the SARSEP. This minimum contribution is not required for key employees.
