The Highly Compensated Employee and a 401k

The highly compensated employee and the 401(k) have a lot to do with each other when it comes to IRS rules. Employees that are considered to be highly compensated have special rules when it comes to contributing to a 401(k). Here are a few things to consider about a highly compensated employee and the 401k.

What Is a Highly Compensated Employee?

As of 2010, if you make more than $110,000 per year, then you are considered a highly compensated employee. You could also be considered a highly compensated employee if you own more than five percent of a business over the course of a given tax year. 

Discrimination Testing

Every year, the 401(k) must have a discrimination test done to it. This is a process that checks to make sure that, percentage-wise, all of the other employees are able to contribute to their 401(k)s as much as the highly compensated employees are. The test will see what the average contribution percentage for all employees is. If the difference between the average and the non-highly compensated employees is more than 2 percent, the money for the highly compensated employees' accounts will have to be lowered. In this case, if you are a highly compensated employee, part of your contribution will be refunded to you.

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