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What is a Highly Compensated Employee?
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Are you a highly compensated employee? No matter what you make, you probably don’t feel like a highly compensated employee (what’s that old saying – happiness is making a dollar more than you’re wife’s sister’s husband? 
), but you might just be one. Whether or not you’re a highly compensated employee has an impact on your employer’s retirement benefits package. The retirement program has to prove that there is no bias towards highly compensated employees or it could lose the tax breaks it gets for having a retirement package.
A highly compensated employee is someone who owns more than a 5% interest in your business at any time during the year. Or, they could be considered highly compensated if they, in the preceding year, received compensation in excess of a specified amount (see the list below) and, if you choose to add this criteria, be in the top 20% of employees when ranked by compensation.
Highly compensated employee compensation limits:
- 2006-2007: $100,000
- 2008: $105,000
- 2009-2010: $110,00
So if you earned more than $110,000 last year (2009) then you could be considered a highly compensated employee. Congratulations!
The bias becomes a factor because many companies contribute to a defined benefit or defined contribution plan based on the employee’s salary. Those earning more will naturally get a bigger benefit from the employer’s retirement package and the IRS wants to avoid this bias towards more richly compensated employees. They compare the amount the company contributes to the pool for highly compensated employees to the amount the company contributes to the remaining employees. if the difference is too great, as fined in this document, then the company could lose its tax benefits.
OK so what? If you are a highly compensated employee, you might be limited in how much you can contribute to your retirement plans. While the typical 401(k) plan limits employee contributions at $16,500, your employer may drop that limit to account for potential pension (defined benefit) contributions they are making on your behalf because of your salary. So if you are like my friend, who just recently received this letter, now you know what it means to be highly compensated.
Congratulations!
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Luckily my wife’s sister isn’t married.
My wife doesn’t have a sister..but her brother makes more than me. dang it.
I imagine this happened to many companies as pay cuts roll through people cut back on their contributions and then Highly Compensated folk get their notices.
This happens to me every year at my current company so my max contribution to our 401K is limited to 6%. I wish I could save more in a 401K but I had to go outside work and open an IRA. I guess there are worse problems to have.
I wish I had this problem.
Becky:
Is your company’s 401(k) a defined benefit plan – or do you have another defined benefit retirement plan for which you are eligible? If either is the case, you are considered to be covered by the plan even if you decline to participate, and your IRA contributions may not be deductible under those circumstances.
I’m definitely not highly compensated…darn.
I got lucky this year and only got like $200 of my maxed out contribution returned. This is NOT a good problem to have (i know it’s all relative and in reality this is not a horrible problem). There are so few places to save money that are tax-deferred, especially for HCEs.
Interesting. For some reason my wife’s employer doesn’t have this issue (law firm). 80% of her company’s employees fall into the highly compensated bucket. I assume they pile extra money into the non-highly compensated folks’ accounts to make sure they don’t get fined.
Jake, If you look at the $110,000 figure as the test they also have to be in the top 20% of employees at the company. So if most of the people make over $110,000 (like at a successful law firm) then the real test is if the salary is in the top 20% for the firm.
Brooklyn money- Agree. there are not enough tax deferred options available outside the 401K. I used to work in a law firm and they don’t have that problem because the majority of the employees there are HCE’s. It all depends on the percentage of HCE’s to non-HCE’s in determining how much can be contributed.
huh. I actually didn’t know there’s set criteria (in terms of compensation #) to define “highly compensated employee” and figured it was a per business basis — since a law firm may have a high % of “highly compensated employee” ratio to non-highly compensated employees.
woops just noticed that the law firm angle was already mentioned.
whats unfortunate is if you’re just at the borderline and you’re being subjected to the contribution limit match etc. its always a bit stupid if you make a little bit less, you may actually reap more benefit (such as the working poor that may get screwed out certain assistance because they make $1k more per year vs. qualifying poverty level).
different type of ‘making too much’ problems, of course.
yeah not even close to a highly compensated employee. le sigh
Highly compensated I am…I get Sundays off and Saturdays I get to work for free!
I have got this email the last 5 years. Once it got so bad I got a check where they returned money I had put in. In my company the problem seems to have been such a small percent of the lower wage earners joined the plan. They changed the plan to automatically enroll people and then you had to opt out. I’ve never gotten a check since.
I’m grateful the first real job I had. After I didn’t sign up for the 401(k) the CEO called me to his office and took 20 minutes of his time to educate me.
It’s a good boss who looks out for the welfare of his/her employees.
I’m sure the boss was looking out for him self too.
himself or him self? English teachers help.
saladdin
himself
I had no idea there was an actual definition for highly compensated.
Any word on highly compensated employees for an ESOP?
I’m not married, so what’s the adage for me? If it’s the girlfriend, her sister is way too young to be married!
I am not highly compensated nor do I feel that I am compensated enough in my company…
I have a question re 401K contribution – I have heard that IRS limit for 2009 yr for 401K was 16500 if u filed married file jointly. Say if i have 401K at work and do 16500 pre tax contribution already fm my paycheck – does that mean my wife can not put any money in her employer offered 401K?
if she also puts some money away, we as couple would go above 16500, will that be a problem?
Josh, I work for a 401k/pension third party administrator. The $16,500 is an individual limit and your spouse’s contribution has no bearing on it. You both can contribute $16,500 to 401k plans.
Does anyone know if the $110K refers to an employee’s actual salary, or if that dollar amount includes other benefits, such as health insurance? My husband doesn’t make anywhere near $110K in salary/bonus (if he gets a bonus), but the company pays a big portion of our health insurance. They also pay for accidental death insurance, life insurance, etc.
It’s usually just salary, not other benefits like AD&D, medical, life, etc.
Hi guys… my name is roderick from the philippines and currently working in dubai UAE.
I was hired last July 2008 at Emirates Flight Catering-Linencraft in a Grade 2 position which is a Team Member. but i was working at administration department handling with customer service calls from Cabin crew & pilot staff/hotel clients and also doing with accounts job.
It has been 2 years now that my salary is only about 1,200 UAE Dirhams including overtime that is 12 hours a day from 7am to 19pm.
With this, i would like to ask if am i compensated with my work?
Awaiting for your comments guys…. what should i do? please advice.
You are over compensated. In my opinion you should only be making 800 UAE Dirhams.
Really? do u think am i?????
Really???…. do u think am i????