Key employee, in U.S. Internal Revenue Service (IRS) terminology, is an employee classification used when determining if company-sponsored qualified retirement plans, including 401(a) defined benefit plans and 401(k)s, are considered "top-heavy" or, in other words, weighted towards the company's more highly compensated individuals.
A key employee is defined by the IRS as an employee, either living or dead, who meets one of the following three criteria:
- An officer making over $175,000 in 2018 or $180,000 in 2019 (the income threshold is indexed by the IRS and may increase each year);
- A 5% owner of the business (defined as one who either owns more than 5% of the business, or is credited with more than 5% ownership of the business through Family-Attribution Rules), or
- An employee owning more than 1% of the business and making over $150,000 for the plan year.
All other employees are referred to as non-key employees.
There are some similarities between key employees and so-called highly compensated employees (HCE), but the compensation salary threshold is lower for HCEs, at only $120,000 versus $150,000 for key employees.
- "Key Employee". investopedia.com. Retrieved 2016-04-01.
- "401(k) Plan Fix-It Guide - The plan was top-heavy and required minimum contributions weren't made to the plan". irs.gov. 2015-10-23. Retrieved 2016-04-01.
- "Definitions". irs.gov. 2016-10-26. Retrieved 2016-04-01.