Do you have highly paid employees? Even if you don’t, you might have workers who are considered highly compensated employees. Or, you might be considered a highly compensated employee.
Find out if you or any of your employees are highly compensated employees. And, learn what highly compensated employees mean for your payroll.
What is a highly compensated employee?
The definition of a highly compensated employee depends on the situation. Below are the definitions for two situations.
The Fair Labor Standards Act (FLSA) has a special highly compensated employee exemption. This means you do not have to pay overtime wages to workers who are defined as highly compensated employees by the FLSA.
An FLSA highly compensated employee must meet all of the following qualifications:
- The employee must earn $100,000 or more per year, including at least a $455 weekly salary.
- The employee must primarily perform office or non-manual work.
- The employee must regularly perform at least one of the exempt duties of an exempt executive, administrative, or professional employee.
The total annual compensation can include the salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
A highly compensated employee does not need to meet all the duties of an executive, administrative, or professional worker. For example, an employee might need advanced knowledge and exercise judgment, which is part of the professional exemption. Even if the employee doesn’t meet any other duties for a professional exemption, the one duty can qualify the worker as a highly compensated employee.
Understanding highly compensated employees is important for employer-sponsored, tax-advantaged retirement plans.
A highly compensated employee must meet one of the following qualifications:
- The employee must earn more than 5% of the interest in the business at any time during the previous year, regardless of compensation.
- The employee must have received more than $120,000 from the business during the previous year (if the preceding year is 2016 or 2017).
- If the employer chooses, employees must be in the top 20% of employees when ranked by compensation.
The compensation limit has the potential to change every year. Make sure you check the latest limit to determine if your employee is a highly compensated employee.
Many plans also require you to put measures in place to prevent discrimination between high and low-wage workers. For example, there are 401(k) rules for highly compensated employees. Highly compensated workers shouldn’t have unfair access to retirement plans.
The highly compensated employee designation helps make retirement plans more fair for all employees. Many retirement plans limit the amount highly compensated employees can contribute to the plans. This helps prevent a large savings gap between high and low-wage workers.
Highly compensated employee variations
You might come across other highly compensated employee definitions. Some benefits might have the definitions to prevent high-wage workers from receiving more or better benefits. The limits for each benefit might be different.
When you add benefits to your business, make sure you check to see if there are any highly compensated employee rules.
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This article is updated from its original publication date of 6/7/2012.