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Highly Compensated Employee

Highly Compensated Employee

This article explains the concept of highly compensated employee in context of 401k plans, in an easy-to-understand way.
Charlie S
Employees are the ones who help run the organization in a systematic manner and achieve company objectives. Qualified and dedicated employees are required in all departments of corporate houses. However, the capability and competence levels of all are rarely the same, and it is quite natural that people with high intelligence levels and higher productivity are allotted more challenging jobs. The salaries of professionals working at top posts such as Presidents, Chairman, Chief Executive Officer (CEO) are quite high, as compared to middle management or junior management employees. This is where the concept of highly rewarded employee comes into picture.


With the availability of stock options, there are many people who hold substantial stakes in a company, in terms of private equity. The valuation of their stake is much higher, and hence these people are known as highly compensated employees of that company. The IRS rules state that any person who holds equal to or more than five percent stake in a company will be treated as a highly compensated employee. In monetary terms, if a person is earning more than $110,000 per year, then he will be included in this category. We all know that all employers have their own retirement packages for their employees. Generally, the retirement packages are more favorable for highly paid employees whose incomes are quite high, as compared to the incomes of other employees. This kind of discrimination among high paid and other lesser paid employees is quite unfair according to the IRS.

In order to control the situation fully, in favor of high-salaried employees, rules have been made that can limit their contribution to employee retirement planning. Any employee included in the highly paid employee package will be able to invest just two percent more than the other employees in his retirement package program. In the US, 401k is a plan for all employees belonging to top management or junior management to save for their retirement and hence having transparency and equality about the implementation of this plan is a necessity.

As per the rules laid down by the Internal Revenue Service (IRS), any company that's unsuccessful in reducing the huge differences between the retirement packages, earned by highly compensated employees and other employees, will have to lose out on tax deductions, which it can avail for retirement plans. This will indeed put a lot of pressure on the financial situation of the company and hence all companies are seen following the rules and regulations strictly.

The income earned by these employees is much higher in the course of their employment, and the ones who really need a lot of retirement benefits are the middle and lower level employees whose salaries can never match the top paid executives. Therefore, this is the best way of rewarding the low-salaried people to live a better life and raise their standard of living. The rules about highly compensated employees have been implemented sincerely in many developed counties. Now, it is time for developing nations to control the over dominance of highly paid executives. Since the number of employees earning average, or below average, income are more in developing counties, these measures will help common employees to a great extent.

Employers should take these factors into consideration, and act smartly, to help all the staff get equal monetary benefits.