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March 25, 2021

Highly Compensated Employee (HCE)

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Definition

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.

Referring Cite

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.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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