what is Highly Compensated Employee

Highly Compensated Employees (HCEs) are defined as those who meet certain ownership or compensation thresholds set by the IRS. Here's a breakdown of the key points:

1. **Ownership Test**: An HCE is an individual who owns more than 5% of the company sponsoring the plan at any time during the current plan year or during the previous year.
2. **Compensation Test**: An employee is considered an HCE based on compensation if they received more than a specified dollar limit ($155,000 for 2024) from the company in the immediately preceding year. This limit is indexed for inflation.
3. **Top 20% Election**: An employer can elect to classify an employee as an HCE if they are in the top 20% of employees ranked by compensation within the lookback year. This election applies for all subsequent years unless revoked.

Understanding HCEs is crucial for plan administrators to ensure compliance with IRS regulations and to design retirement plans that provide equitable benefits to all employees.