Highly Compensated Employee: Overview and Threshold

By Lyle Daly – Updated Jun 2, 2025 at 1:06 PM | Fact-checked by Frank Bass

Key Points

Highly compensated employees (HCEs) own at least 5% of the company where they work or who pass a compensation test.
If your employer's 401(k) fails the nondiscrimination test, excess contributions could be distributed back to HCEs.
Ask about HCE status and past test failures when considering job offers.

The IRS classifies you as a highly compensated employee if you meet specific ownership or income standards with your employer. This classification can affect your 401(k) contributions, but only in certain situations.

Loading paragraph...

An egg with 401(k) written on it on top of a pile of cash. — Image source: Getty Images.

Loading image...

Loading paragraph...

It's up to your employer to decide if it will contribute more for non-HCEs or distribute contributions to HCEs. Distributions may not be for a large amount, but they will increase your tax liability for the year. While you can't always avoid this, you can see whether you'd be considered a highly compensated employee when negotiating a job offer. If so, you may want to ask if the company has failed a nondiscrimination test before.

Loading paragraph...

Related investing topics

Loading paragraph...

Traditional 401(k) vs. Roth 401(k): What's Best for You?

Employers often offer both plans for you to choose from. Here's how to do it.

Retirement Savings Gap Statistics: Are Americans Ready for Retirement?

Nearly half of households are at risk of a retirement savings shortfall.

HSA vs. PPO Plans: Which One Benefits You More?

Which one is a better fit for your healthcare coverage? We break each plan down here.

How to Calculate My Monthly Take-Home Salary

To calculate your monthly take-home salary, you just need some information about your tax situation and payroll deductions.

Loading hub_pages...

Loading paragraph...

About the Author

Lyle Daly is a contributing Motley Fool stock market analyst covering information technology and cryptocurrency. Lyle has been a contributor at the financial services company since 2018. His work has been featured on USA Today, Yahoo Finance, MSN, Fox Business, and Nasdaq. Before joining The Motley Fool, he wrote for financial brands including Intuit.

TMFLyleDaly

@LyleDaly

The Motley Fool has a disclosure policy.