Highly Compensated Employees

"Highly compensated employee” (HCE) is a key concept in nondiscrimination testing. A retirement plan is discriminatory if HCEs are unduly favored in terms of contributions, optional forms of benefits, or other plan benefits, rights and features.

An employee is not considered to be an HCE unless he or she received compensation of $80,000 or more (adjusted for cost of living) in the prior plan year. For 2012 plan years, only employees with compensation of more than $115,000 in 2011 are treated as HCEs. For employers with many highly paid employees, an election to treat only the top paid 20% as HCEs for testing purposes may be made—even if more than 20% exceeded the dollar limit in the prior year (“top-paid group election”). Plan documents should reflect whether the HCE group will be limited to the top 20%.

A plan covering only non-highly compensated employees (NHCEs) automatically meets all nondiscrimination requirements.

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