A highly compensated employee (HCE) is any employee who —
- Was a 5-percent owner at any time during the year or the preceding year, or
- For the preceding year — had compensation from the employer in excess of $130,000 (2021 ), and
- If the employer elects the application of this clause for such preceding year, was in the top-paid group of employees for such preceding year.
An employee is in the top-paid group of employees for any year if he/she is in the group consisting of the top 20 percent of the employees when ranked on the basis of compensation paid during the year.
An employee is treated as a 5-percent owner for any year :
- If the employer is a corporation, any person who owns more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation, or
- If the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer.
IRC § 414(q)(1)
Additional Helpful Information
A qualified plan must perform nondiscrimination testing to ensure contributions or benefits do not discriminate in favor of highly compensated employees.