What they are referring to is in terms of pension or fringe benefit plan qualification. First, a qualified plan treats everyone the generally the same regardless of their income or diretorship status, and only then will the IRS qualify the plan and allow the employees to accept the benefit (e.g., a pension contribution) as exempt from income. If a plan is not qualified it generally is considered "top heavy" because "key" employees or high wage earners get a disproportionate amount of benefits.
To determine if your plan is top-heavy, you must first identify key employees - any employee (including former or deceased employees), who at any time during the plan year was:
- An officer making over $170,000 (2015 and 2016);
- A 5% owner of the business (a 5% owner is someone who owns more than 5% of the business), or
- An employee owning more than 1% of the business and making over $150,000 for the plan year.
A non-key employee is everyone else.
A plan is top-heavy when, as of the last day of the prior plan year, the total value of the plan accounts of key employees is more than 60% of the total value of the plan assets. In other words a disproportionate amount of benefits, in the eyes of the IRS, favors the higher-ups. The IRS allows this to be fixed generally within 2 years. If not then the plan loses qualification, and the benefit is income to employees.
So what this means is that the board is going to take stock that is not available to all employees, and it will be a non-qualified deferred compensation plan.