What Is A Highly Compensated Employee?

Do you employ any highly compensated employees (HCE)?

A highly compensated employee (HCE) is any employee who owns at least 5% of shares in a company and earns more than $100,000 per year. The total compensation can include salary, commissions, bonuses, and other non-discretionary compensation. A HCE can also be an individual whose pay is in the top 20% at his or her company.

Additional requirements include:

-The HCE earns at least a $455 weekly salary.
-The HCE primarily performs office or non-manual work.
-The HCE regularly performs at least one exempt duty that an exempt executive, administrative, or professional employee performs.

The above qualifications are set by the Fair Labor Standards Act. Should you employ an HCE, you do not have to pay that person overtime wages. Essentially, HCE’s are treated as exempt employees.

Highly compensated employees can qualify for tax-deferred retirement plans if they meet certain qualifications. Previously, HCEs qualified for tax-free plans which allowed them to lower their tax liabilities. Now, HCEs are given tax-deferred retirement plans. It is important for payroll professionals to note that just because an employee may be an HCE, doesn’t automatically qualify him or her for this type of retirement plan. Here are the pertinent qualifications:

 -The HCE must have earned more than 5% interest in the company in the previous calendar year.
-The HCE must have received more than $120,000 from the company during the previous year.
-The HCE’s pay must be in the top 20% of the company’s overall payroll. This qualification is not mandatory.

The  compensation limit above has the potential to change every year. Keeping up-to-date on the latest limit to make sure your employee is truly a highly compensated employee is integral, and will help prevent huge gaps between your high wage earners and low wage earners’ retirement plans.

Have more questions about highly compensated employees? Check out PayrollTalk.