West Virginia State Life Insurance Practice Exam

In a qualified retirement plan that is "top heavy," what does this indicate?

1. Low participation from non-key employees

2. More than 60% of plan assets are in key employee accounts

3. A high balance of employer contributions

4. Insufficient funding of the plan

The correct answer is: More than 60% of plan assets are in key employee accounts

In a qualified retirement plan, the term "top heavy" specifically refers to a scenario where more than 60% of the plan's assets are allocated to the accounts of key employees. Key employees generally include individuals such as officers, shareholders who own more than 5% of the company, and highly compensated employees. When a plan is determined to be top heavy, it prompts certain minimum contribution requirements to non-key employee accounts to ensure that they receive sufficient benefits from the plan. Understanding this concept is crucial for compliance with regulations that govern retirement plans, as it aims to promote equitable treatment of employees and prevent disproportionate benefits to a small group of key individuals.