The IRS defines Highly Compensated Employees (HCEs) as individuals meeting one or both of the following criteria:
- They earned compensation greater than an indexed limit in the prior For example, anyone earning more than $160,000 in 2026 will be considered an HCE in 2027.
- They own, directly or indirectly, more than 5% of the business at any time during the current or prior year. Note that, due to attribution rules, certain family members are considered to own the same ownership shares of their relatives for this purpose.
The determination of HCEs is critical in the administration of tax-qualified retirement plans, since those plans are subject to various nondiscrimination testing rules. In a nutshell, HCEs are not permitted to earn retirement benefits during a year that are impermissibly more valuable than the benefits earned by the business’ non-HCEs.
Nondiscrimination testing is generally performed after the end of each year, and a testing failure is rectified by giving smaller benefits to HCEs, or (more commonly) larger benefits to non-HCEs.
To learn more about how HCEs impact your retirement plan, please contact one of our actuarial consultants.
