- Adam would obviously be an HCE because he owns more than 5% of the company and makes more than $160,000.
- Danielle would also be considered an HCE because she owns more than 5% of the company, even though her salary is only $70,000.
- Betty and Charles would also be considered HCEs unless the company decides to make a top-paid election. The top 20% of a 10-person company would be the top two employees -- Adam and Betty. In this case, Betty would still be considered an HCE but Charles would not because he falls outside the top 20%, even though his income is well above the limit for the year.
Being considered an HCE isn't something most employees have to worry about, but companies must conduct annual nondiscrimination tests to ensure that the 401(k) doesn't unfairly favor HCEs over non-HCEs.
401(k) contribution limits for HCEs
The 401(k) contribution limits for 2024 are $23,000, or $30,500 if you're 50 or older. In 2025, the 401(k) contribution limits are $23,500 for adults under 50, $31,000 for those aged 50 to 59 and 64 or older, and $34,750 for those aged 60 to 63.
HCEs may be able to contribute up to these limits or they may not, depending on how much the company's non-HCEs contribute to their accounts.
A company's annual nondiscrimination tests must ensure that HCE average contributions aren't more than 2 percentage points higher than the average contributions of non-HCEs. Total HCE contributions also can't be more than double the total contributions of non-HCEs.
If a 401(k) fails the nondiscrimination tests, the company must take immediate steps to correct the issue or else the plan could lose its tax-qualified status. The company can fix it by making extra contributions to the non-HCEs' 401(k)s or by requiring HCEs to withdraw some of their contributions.
