Non-discrimination testing (also known as compliance testing) examines the contributions of Key and Highly Compensated Employees to determine whether all employees are treated equally by a company's 401( k ) plan.
Highly Compensated Employees (HCEs)
The IRS Guidelines define Highly Compensated Employees as any of the following:
- Owner of more than 5% of the company (IRS family stock attribution rules apply) in the current year or the previous year.
- An employee with gross compensation in excess of $120,000 in the current or previous year.
- For the preceding year, an employee who received compensation from the business of more than $125,000 (if the preceding year is 2019) or $120,000 (if the preceding year was 2015, 2016, 2017, or 2018), and (if the employer so chooses) was in the top 20% of employees when ranked by compensation.
Highly Compensated Employees hired mid-year will not receive HCE status until the start of the following year when they are eligible to collect the entirety of their salary. For example, an HCE hired in June 2018 does not qualify as an HCE until January 1, 2019.
The IRS Guidelines define Key Employees as any of the following:
- Officers of the company with gross compensation in excess of $180,000 or
- Employees of the company in the current year who: