Rule Atlas
CFP Board · RET-2: Nondiscrimination Rules: Top-Heavy, HCE, and Safe Harbor 401(k)s
Under CFP Board · RET-2 (CFP Board / IRS / SEC), nondiscrimination Rules: Top-Heavy, HCE, and Safe Harbor 401(k)s establishes the authoritative rules tested on the CFP® Certification. Mastering nondiscrimination rules (Top-Heavy, HCE, Key Employee, Safe Harbor) is crucial for CFP® professionals advising businesses on qualified retirement plans. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
HCE vs. Key Employee Comparison
| Category | Highly Compensated Employee (HCE) | Key Employee (Top-Heavy) |
|---|---|---|
| Primary Use | ADP/ACP Nondiscrimination Tests | Top-Heavy Test (60% Rule) |
| Ownership Test | > 5% Owner (current or prior year) | > 5% Owner OR > 1% Owner w/ comp > $150,000 |
| Compensation Test (2026) | Comp > $160,000 (prior year) | Officer w/ comp > $235,000 |
Innovate Corp. sponsors a standard 401(k) plan for its 25 employees. The plan has 5 highly compensated employees (HCEs) and 20 non-highly compensated employees (NHCEs). All employees are eligible to participate. For the 2026 plan year, the HCEs deferred an average of 7.0% of their compensation. Among the NHCEs, 10 employees deferred an average of 3.0% of their compensation, while the other 10 NHCEs chose not to contribute. The plan does not have safe harbor provisions. Which of the following statements accurately describes the plan's compliance status for 2026?
Practitioner Application: Nondiscrimination Rules: Top-Heavy, HCE, and Safe Harbor 401(k)s
A successful small business owner, Dr. Evans, wants to maximize her own retirement savings using a 401(k) plan for her dental practice. She's ready to contribute aggressively for herself, but she's concerned that IRS rules will force her to make expensive contributions for her three employees, undermining the plan's value to her. This is a classic scenario where nondiscrimination rules, especially the top-heavy test, become critical. Failing to navigate these rules can lead to plan disqualification and severe penalties.
- The IRS uses two distinct definitions to ensure fairness in retirement plans. Confusing them is a frequent mistake. Think of them like two different security badges for accessing different restricted areas.
- Highly Compensated Employee (HCE): This badge is used for annual nondiscrimination testing (like the ADP and ACP tests). For 2026, an individual is an HCE if they meet either criterion: 1. Ownership: They owned more than 5% of the business at any time during the current or preceding year. 2. Compensation: They received compensation from the business of more than $160,000 in the preceding year (2025).
Common CFP® Certification Distractors on CFP Board · RET-2
- 1Anchor every scenario analysis to the primary text of CFP Board · RET-2 rather than informal workplace shortcuts.
- 2Watch for CFP® Certification distractors that swap calendar days vs. business days, or confuse gross vs. net phase-out thresholds.
- 3Distinguish mandatory statutory requirements ("shall / must") from permissive safe-harbor elections ("may").
- 4Verify effective dates and current-year inflation adjustments before computing dollar caps or penalty rates.
Frequently Asked Questions: CFP Board · RET-2
What is the core rule under CFP Board · RET-2 (Nondiscrimination Rules: Top-Heavy, HCE, and Safe Harbor 401(k)s)?
Under CFP Board · RET-2 (CFP Board / IRS / SEC), nondiscrimination Rules: Top-Heavy, HCE, and Safe Harbor 401(k)s establishes the authoritative rules tested on the CFP® Certification. Mastering nondiscrimination rules (Top-Heavy, HCE, Key Employee, Safe Harbor) is crucial for CFP® professionals advising businesses on qualified retirement plans. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
How is CFP Board · RET-2 tested on the CFP® Certification?
Anchor every scenario analysis to the primary text of CFP Board · RET-2 rather than informal workplace shortcuts. Watch for CFP® Certification distractors that swap calendar days vs. business days, or confuse gross vs. net phase-out thresholds.
Where can I practice CFP® Certification questions on Nondiscrimination Rules: Top-Heavy, HCE, and Safe Harbor 401(k)s?
Test yourself instantly with the free playable CFP® Certification question on this page, or launch VoraPrep's full CFP® Certification adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cfp.