Highly Compensated Employee


Also found in: Acronyms.

Highly Compensated Employee

An employee who owns 5% or more of the company for which he/she works or who makes more income than a certain amount set by the IRS. For tax purposes, highly compensated employees contribute less in tax deductible earnings to a qualifying retirement plan. This is because IRAs and other retirement plans do not qualify for tax advantages if their structures seem to favor highly compensated employees more than other employees.
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Highly compensated employees at nonprofits can adopt this plan as of the first of any month.
Dependent care assistance must be available and provided on a basis that does not discriminate in favor of highly compensated employees or their dependents.
The simplified rules will make it much easier for companies to determine who is a highly compensated employee in testing to determine whether a retirement plan meets nondiscrimination requirements.
These tests are generally designed to ensure that the plan does not significantly discriminate in favor of highly compensated employees.
2007-48, released on July 2, 2007, the IRS analyzed the income and employment tax consequences for the employer, the trustee, and the highly compensated employees who had interests in a 402(b) trust.
The only hard-and-fast rule, as noted earlier, is that the plans may not discriminate in favor of highly compensated employees.
It is intended to ensure that benefits provided by an employer in a separate line of business do not unduly disadvantage non-highly compensated employees or unduly advantage highly compensated employees regardless of the concentration of highly compensated employees in the separate line of business.
CPAs can help plan administrators try to meet the requirements by decreasing the benefits of the highly compensated employee with the highest deferral percentage while still trying to minimize lost tax benefits.
Also, all family members, including adult children, are treated as one highly compensated employee for applying the nondiscrimination rules to a PSP.
Among the requirements that a defined contribution plan, including a 401(k) plan, must meet is that the plan does not substantially favor highly compensated employees.
401(k) plans must meet certain nondiscrimination rules that require non-highly compensated employees to participate in the plans at certain levels compared with the participation of highly compensated employees (called the actual deferral percentage (ADP) test).
Ensuring compliance with ACA's non-discrimination rules regarding favoring highly compensated employees in benefits offered,

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