what is a highly compensated employee hce 
the internal revenue service irs defines a highly compensated employee hce as one who meets either or both of the following standards 1understanding highly compensated employeesthe disadvantage of being classified as a highly compensated employee is that your 401 k plan contributions are limited the irs wants to make sure that the taxable income lowering advantage offered by pre tax contributions doesn t benefit one group of employees more than others the 5 threshold for hces mentioned above is based on voting power or the value of company shares the interest owned by an individual also includes the interest held by relatives such as spouses parents children and grandparents but not grandchildren or siblings 3for example an employee with exactly 5 ownership in the company is not considered a highly compensated employee one with a 5 01 interest in the company has the hce status an employee with 3 holdings in the company will be considered an hce if the person s spouse owns 2 2 interest in the same company making the employee s total interest 5 2 tax deferred retirement plans such as 401 k plans were implemented by the irs to offer equal benefits to all workers initially all employees could contribute as much as they wanted to with the total contribution matched by the employer up to 22 500 for 2023 the figures increase to 23 000 in 2024 4that meant high earners could contribute much more than other employees thus they would benefit to a greater degree from the tax deductions that lower taxable income to correct this disparity the irs set limits on the dollar amount of contributions that can be made by high earners nondiscrimination testthe irs requires that all 401 k plans perform a nondiscrimination test every year the test separates employees into two groups non highly compensated and highly compensated employees by examining the contributions made by hces the compliance test determines whether all employees are treated equally through the company s 401 k plan the nondiscrimination stipulations are designed to make sure that the tax advantages of employee retirement plans do not disproportionately favor highly compensated employees if the average contributions of hces to the plan are more than 2 higher than the average contributions of non hces the plan would fail the non discrimination test in addition contributions by hces as a group cannot be more than two times the percentage of other employee contributions 5if you receive compensation in 2024 that s more than 155 000 and you re in the top 20 of employees as ranked by compensation your employer can classify you as a highly compensated employee 32 compensation includes overtime bonuses commissions and salary deferrals made toward cafeteria plans and 401 k s other considerations