Highly compensated employees

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.

Highly compensated employees.

Highly compensated employees are people whose on-the-job earnings are higher than the level the government has established to differentiate this category of worker.

In 2007, that amount is $100,000. It is increased from time to time to reflect the impact of inflation.

The major consequence of being a member of this group is that the percentage of earnings that highly compensated employees may contribute to their 401(k) or similar plan is determined by the contribution rates of other plan participants who earn less.

If lower-paid employees contribute an average of 2% or less, higher-paid employees may contribute up to twice that percentage.

If the average is 3% to 8%, higher-paid employees may contribute two percentage points more than the average. And if the average is 8% or higher, the maximum for highly compensated employees is 1.25 times that average.

References in periodicals archive ?
Such plans require annual testing to ensure that a 401(k) does not discriminate in favor of highly compensated employees, including owner-employees.
The total annual compensation requirement for highly compensated employees to be exempt from overtime pay will increase to $134,004 per year, up from $100,000 per year.
In a discriminatory plan, highly compensated employees are taxed on the increase in the pension value each year [IRC section 402(b)(4)(A)], Non-highly compensated employees must include in their gross income the vested employer contributions to the plan; the income recognized is added to the employee's basis [IRC section 402(b)(1)].
In addition to finalizing the salary threshold for overtime exemptions, the final rule increases the total annual compensation requirement in order to exempt highly compensated employees (HCEs) from the overtime regulations.
Summary paragraph: Helping highly compensated employees maximize their retirement saving
It means that the plan has highly compensated employees who were unable to save as much for their retirements with pretax income as they would like.
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.
For example, there are limits on the contributions employers and highly compensated employees can make to a 401 (k) plan.
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).
Who are highly compensated employees for purposes of the qualification requirements?
Group long-term disability plans are prompting many employers to look for ways to offer adequate income replacement to highly compensated employees without increasing their exposure to risk and pricing volatility.
Sufficient income protection for highly compensated employees facing indefinite disability is sorely lacking.

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