401k Contributions: What Is a Highly Compensated Employee?

When it comes to 401k contributions, companies have to abide by IRS rules. A 401k plan has to be balanced between highly compensated employees and regular employees in order to maintain its tax advantages. Here are the basics of what a highly compensated employee is according to the IRS.

Ownership

If an employee owns part of the business, she might be considered a highly compensated employee. According to IRS rules, anyone who owns more than 5 percent of the company is considered a highly compensated employee. To be considered highly compensated, the employee has to have been a partial owner of at least that much at any point during the previous year.

Income

Another criterion that could lead to someone's being classified as a highly compensated employee is the amount of income that she earns. For example, in 2009, any employee who earned more than $110,000 for the year is considered to have been a highly compensated employee that year.

Ranking

Another way to determine who is a highly compensated employee is by ranking each employee by the salary he or she earns. Some employers choose to classify the top 20 percent of earners as highly compensated employees in their businesses.



Highly Compensated Employee



A highly compensated employee is an individual that owns more than 5 percent of the business or makes above a specific dollar amount. For example, in 2010, the limit is $110,000. If an employee makes more than $110,000, she is considered a highly compensated employee. The term "highly compensated employee" is important because it relates to 401(k) rules. Every 401(k) plan has to be weighted equally among all of the employees. If only the highly compensated employees in the company are contributing to the 401(k), it will be considered uneven, and the 401k may be shut down.

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