What is a 'Highly Compensated Employee'

A highly compensated employee, for employer-sponsored, tax-advantaged retirement plan purposes, is 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.

RELATED TERMS
  1. Key Employee

    An employee with a major ownership and/or decision-making role ...
  2. Deferred Compensation

    A portion of an employee's compensation that is set aside to ...
  3. Camouflage Compensation

    Compensation that is granted to upper echelon employees, directors, ...
  4. Equity Compensation

    This is one way to attract and retain employees to a startup ...
  5. Workers' Compensation Coverage ...

    Insurance that protects employees under state laws, and provides ...
  6. Workers' Compensation

    Workers' compensation is a publicly-sponsored system that pays ...
Related Articles
  1. Retirement

    How Non-Qualified Deferred Compensation Plans Work

    These tax-advantaged retirement savings plans have their pros and cons, and employers and employees must follow strict guidelines.
  2. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
  3. Retirement

    Deferred Compensation Plans Vs. 401(k)s

    Discover the major advantages and disadvantages offered by deferred compensation plans for retirement as compared to a 401(k) plan.
  4. Trading

    Evaluating Executive Compensation

    Find out how to determine whether a CEO is being overpaid.
  5. Personal Finance

    5 Tech Companies With High Stock-Based Compensation (GOOGL, AMZN)

    Examine stock-based compensation among large tech firms to determine which factors are driving equity compensation and how executive grants are determined.
  6. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
  7. Managing Wealth

    Deferred Compensation Plans for Nonprofits

    Learn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.
  8. Small Business

    Deferred Compensation Plans for Small Business Owners

    Find out the best tax-qualified options business owners can use to defer their compensation and accumulate capital for their retirement.
  9. Taxes

    How Non-Qualified Deferred Compensation Is Taxed

    The tax savings of non-qualified deferred compensation plans are not the only tax fact you need to know before signing up for one.
  10. Managing Wealth

    A New Approach To Equity Compensation

    The new financial accounting standard known as FAS 123R could take a bite out of your portfolio. Find out why here.
RELATED FAQS
  1. How can an entrepreneur save for retirement?

    Learn about the retirement savings plan options for entrepreneurs and small business owners, including administration and ... Read Answer >>
  2. Mike is a highly compensated employee of XYZ Company, his company has offered him ...

    The correct answer is b): One of the most common types of nonqualified retirement plans is the deferred compensation plan. ... Read Answer >>
  3. Can you fund nonqualified deferred compensation plans with life insurance?

    Understand if a person can fund nonqualified deferred compensation plans with life insurance. Learn what types of plans are ... Read Answer >>
  4. What is an evergreen provision and how does it affect shareholders?

    It is common for publicly-traded corporations to provide more than just regular salary compensation to their management and ... Read Answer >>
  5. What are some ways employers can reduce employee turn over?

    Learn a few strategies in hiring, compensation and management that employers can use for increasing employee retention and ... Read Answer >>
  6. How do restricted stocks, treasury stocks and stock appreciation rights benefit employees?

    Restricted stock represents any equity that is conditionally given or sold to an insider as compensation or as part of an ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center