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Highly Compensated Employee (HCE)

Contents

  1. Demystifying Highly Compensated Employees
  2. Insight into Retirement Plan Compliance
  3. The Nondiscrimination Test and Special Considerations

Unraveling the Concept of Highly Compensated Employees (HCEs)

Demystifying Highly Compensated Employees

Highly Compensated Employees (HCEs) are individuals meeting specific criteria set by the Internal Revenue Service (IRS), including owning more than 5% interest in a business or earning compensation above a certain threshold. Understanding HCEs is crucial for both employers and employees in navigating retirement plan regulations.

Insight into Retirement Plan Compliance

Tax-deferred retirement plans like 401(k) plans aim to provide equitable benefits to all employees. However, HCEs, due to their higher earnings, may disproportionately benefit from such plans. To ensure fairness, the IRS mandates annual nondiscrimination tests, analyzing contributions from HCEs to ascertain equality in plan benefits distribution.

The Nondiscrimination Test and Special Considerations

The nondiscrimination test scrutinizes contributions by HCEs relative to non-HCEs to prevent favoritism. Employers failing this test risk losing tax-qualified status for retirement plans, necessitating corrective actions such as additional contributions for non-HCEs or distributions to HCEs. Understanding these regulations is imperative for employers to avoid penalties and maintain compliance.