Highly Compensated Employee

DEFINITION of 'Highly Compensated Employee'

For employer-sponsored, tax-advantaged retirement plan purposes, anyone who is a 5% owner of a company or who received more than $110,000 in compensation in 2010 (the compensation limit is adjusted annually). If the employer chooses, a highly compensated employee may also be defined as any employee whose pay is in the top 20% of compensation for that company.

BREAKING DOWN 'Highly Compensated Employee'

When a company contributes to a defined-benefit or defined-contribution plan for its employees and those contributions are based on the employee's compensation, the Internal Revenue Service wants the company to minimize the discrepancy between the retirement benefits received by highly compensated and lower compensated employees. If the difference is too great, the company can lose the tax deduction it gets for the retirement plan.

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RELATED FAQS
  1. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>
  2. Are fringe benefits deductible for the employer?

    A fringe benefit is any non-wage form of compensation and is usually offered by an employer as both an employee incentive ... Read Full Answer >>
  3. Can LLCs have employees?

    A limited liability corporation (LLC) can have an unlimited number of employees. An employee is defined as any individual ... Read Full Answer >>
  4. Do flexible spending accounts (FSA) funds roll over?

    An individual can utilize an employer’s cafeteria plan of employee benefits to establish a flexible spending account (FSA). ... Read Full Answer >>
  5. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  6. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
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