A highly compensated employee (HCE) is, according to the Internal Revenue Service, anyone who has done one of the following: Owned more than 5% of the interest in a business at any time during the year or the preceding year, regardless of how much compensation that person earned or received.
How do you determine if someone is an HCE?
An employee is an HCE if he or she is an employee during the short plan year and his or her compensation during the 12-month period immediately preceding the plan year (lookback year) exceeded the dollar limitation under IRC Section 414(q)(1) for the lookback year.
What is considered a HCE for 401k?
The IRS defines a highly compensated employee as someone who meets either of the two following criteria: Received $130,000 or more in compensation from the employer that sponsors his or her 401(k) plan in the previous year.
What compensation is used to determine HCE status?
HCE status based on compensation (not on ownership) is determined using compensation earned during the preceding year or 12-month period, referred to as the “look-back year.” If the year for which HCE status is being determined is not a calendar year, the sponsor may make a calendar year election so that HCE status is …
How is an employee determined to be a HCE?
The IRS has what’s known as family attribution, which means you can be determined to be an HCE by blood. An employee whose a spouse, child, grandparent or parent of someone who is a 5% (or greater) owner of the business, is automatically considered to be a 5% (or greater) owner.
What makes an employee a highly compensated employee ( HCE )?
For example, an employee with 3% holdings in the company will be considered an HCE if his spouse owns 2.2% interest in the same company (total interest is 5.2%). If the average contributions of HCEs to the plan are more than 2% higher than the average contributions of non-HCEs, the plan would fail the non-discrimination test.
Can a 401k contribution be reclassified as a HCE?
If you’re determined to be an HCE after the fact – like after you’ve made a full 401 (k) contribution for the year – the contribution will have to be reclassified. The excess will be refunded to you, and not retained within the plan. An important tax deduction will be lost. Here’s another little wrinkle…an HCE isn’t always obvious.
How much can a HCE contribute to a plan?
In the simplest terms, contributions made by HCE’s can’t be excessive when compared to those of non-HCE’s. For example, if the average plan contribution by non-HCE’s is 4%, then the most an HCE can contribute is 6%. We’ll get into why that is in a bit.
