18.4 Required and Permissive Aggregation Groups & Former Key Employees

Top-Heavy Is a Group Test, Not a Plan Test

A common misconception is that top-heavy status is determined plan by plan. It is not. IRC §416(g)(2) requires the test to be run on an aggregation group, and every plan in a top-heavy aggregation group is top heavy — even a plan that, standing alone, would have passed comfortably.

The Required Aggregation Group

IRC §416(g)(2)(A)(i). The required aggregation group consists of:

1. Every plan of the employer in which a key employee participates during the plan year containing the determination date, or during any of the four preceding plan years; and
2. Every other plan of the employer that must be considered to enable a plan in category 1 to satisfy IRC §401(a)(4) or IRC §410(b).

Category 2 is the one candidates forget. If the owner's plan can only pass coverage by being aggregated with the rank-and-file plan, that rank-and-file plan is dragged into the required aggregation group and is tested — and if the group is top heavy, both plans are top heavy.

"Employer" here means the entire controlled group under IRC §414(b), (c), and (m), plus affiliated service groups. Terminated plans that were maintained within the five-year lookback are included as well.

The Permissive Aggregation Group

IRC §416(g)(2)(A)(ii). The employer may elect to add plans that are not required to be aggregated. Two conditions:

1. The added plan(s) must cover employees of the same employer; and
2. The enlarged group must continue to satisfy §401(a)(4) and §410(b).

The strategic use: an employer with a small, key-employee-heavy plan (say, 78% key) and a large rank-and-file plan (12% key) may permissively aggregate them. If the combined ratio drops below 60%, neither plan is top heavy, and the employer avoids the 3% minimum contribution in the small plan.

Worked example. Sabine Holdings sponsors two plans as of the December 31, 2026 determination date.

Plan	Key balances	Non-key balances	Total	Key %
Executive Plan	$3,400,000	$900,000	$4,300,000	79.1%
Staff Plan	$700,000	$9,600,000	$10,300,000	6.8%

The Executive Plan alone is top heavy at 79.1%. Assume no key employee participates in the Staff Plan and the Executive Plan passes coverage on its own, so aggregation is not required.

Permissively aggregating:

$\frac{\$3,400,000 + \$700,000}{\$4,300,000 + \$10,300,000} = \frac{\$4,100,000}{\$14,600,000} = \mathbf{28.1\%}$

Because 28.1% is below 60%, neither plan is top heavy for 2027. The election is available only if the enlarged group still satisfies §401(a)(4) and §410(b) — which it does here, since the Staff Plan covers a broad NHCE population.

Note the trade-off: had a key employee participated in the Staff Plan, aggregation would have been required, and the employer would have had no choice.

Former Key Employees

A former key employee is a participant who was a key employee in a prior plan year but is not a key employee for the current determination year — for example, an officer whose compensation dropped below the $235,000 2026 threshold, or who ceased to be an officer.

The rule is absolute and asymmetric: the account balance of a former key employee is excluded from both the numerator and the denominator of the top-heavy ratio.

This is different from every other exclusion in the Code, and it is the point most often missed. Compare:

Worked example. Torrence Systems' December 31, 2026 determination date balances:

Participant	Status	Balance
Alonzo	Key (owner)	$1,200,000
Bettina	Key (officer, comp $260,000)	$600,000
Cyrus	Former key (officer through 2023; 2026 comp $140,000)	$850,000
Staff (aggregate)	Non-key	$1,900,000

Incorrect computation treating Cyrus as non-key: $1,800,000 ÷ $4,550,000 = 39.6% — not top heavy.

Correct computation excluding Cyrus entirely:

$\frac{\$1,200,000 + \$600,000}{\$1,200,000 + \$600,000 + \$1,900,000} = \frac{\$1,800,000}{\$3,700,000} = \mathbf{48.6\%}$

Still under 60%, but the correct figure is nine points higher. Because removing a large former-key balance shrinks the denominator, excluding a former key employee always raises the ratio — the opposite of most administrators' intuition.

Other Adjustments to the Ratio

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Common ASPPA QKA Exam Traps

• Trap 1 — Treating a former key employee as non-key. They are removed from both sides of the fraction.
• Trap 2 — Forgetting category 2 of the required group. Plans needed for another plan to pass §401(a)(4) or §410(b) are pulled in.
• Trap 3 — Believing permissive aggregation is unlimited. The enlarged group must still satisfy §401(a)(4) and §410(b).
• Trap 4 — Using the same lookback for all distributions. In-service distributions look back 1 year; severance, death and disability distributions look back 5 years.
• Trap 5 — Counting an unrelated rollover. Excluded; a related rollover is included.
• Trap 6 — Testing plan by plan. If any plan in the aggregation group is in a top-heavy group, every plan in that group is top heavy.