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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.

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