Who is an Officer, Highly Compensated or Key employee?

Who is a Highly Compensated or Key Employee?

Within the context of a 401(k) plan, certain participants are considered to be Highly Compensated Employees (HCEs) or Key employees. Participants are classified in this manner for the purpose of conducting required nondiscrimination testing to ensure the plan is not disproportionately benefiting highly-paid employees and owners. You can visit this article to learn more about ownership and what this means for your plan. 

You are a Highly Compensated Employee (HCE) if you:

  • Earned more than $125,000 in 2019 and  
  • Were in the top 20% of all employees ranked by compensation (if the employer has chosen to use the Top Paid Group); or
  • Own more than 5% of the company sponsoring the 401(k) plan, (including stock options and restricted stock), or
  • Are a spouse, child, grandchild, or parent of a greater than 5% owner.

You are a Key employee if you:

  • Are an officer earning over $185,000 in 2020 (or $180,000 in 2019); or 
  • Own more than 5% of the business; or 
  • Own more than 1% of the business and earn over $150,000 
  • Are a spouse, child, grandchild, or parent of a >1%+ or >5%+ owner.

Who is an officer?

For purposes of your 401(k) plan, officers will generally include the president, vice-presidents, general managers, and others who perform duties normally corresponding to those positions. Determination of whether an employee is an officer is based on their actual authority in the company and not on their title. Keep in mind if you’re an officer earning more than $185,000, you will automatically be deemed a Key Employee. This determination may impact your Top Heavy testing results.

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