Who qualifies as a highly compensated employee (HCE)?

The classification of a highly compensated employee (HCE) is primarily defined by the Internal Revenue Code, which outlines specific criteria for determining who falls into this category.

One key aspect of this classification is based on ownership and compensation, which aligns with the stated answer. An employee qualifies as an HCE if they own more than 5 percent of the employer, which indicates a significant level of involvement and investment in the company. Additionally, the compensation threshold is also a crucial factor; employees who earn over $120,000 are generally classified as highly compensated due to their income level, which reflects their seniority or specialized skills within the organization.

This dual criterion—ownership percentage combined with compensation level—enables companies to accurately identify HCEs for the purposes of non-discrimination testing in retirement plans and ensuring compliance with regulatory requirements. This blending of ownership and income assessment assures that those who have more influence or stake in the company are properly recognized.