2016 Highly Compensated Employee Threshold
For 2016, the Highly Compensated Employee Threshold figures are $120,000 (Highly compensated employee threshold) and $170,000 (Key employee threshold).
Effective 2016-01-01Source: Notice 2015-75 (IRS)Verified 2026-09-03
Who it applies to
Employers maintaining qualified retirement plans and employees determining their status as highly compensated or key employees for 2016 plan years.
What changed this year, and why
The IRS announced cost-of-living adjustments to retirement plan limits for 2016 under Notice 2015-75. The highly compensated employee threshold remained unchanged at $120,000, and the key employee threshold remained unchanged at $170,000.
Common questions
- What is the highly compensated employee threshold for 2016?
- For 2016, the highly compensated employee threshold under IRC § 414(q)(1)(B) is $120,000.
- What is the key employee threshold for 2016?
- For 2016, the key employee threshold under IRC § 416(i)(1)(A)(i) for top-heavy plans is $170,000.
The 5% owner test ignores what you are paid
Under this test, an individual is classified as a highly compensated employee if they owned more than 5% of the interest in the business at any time during the year or the preceding year. The critical aspect of this rule is that it applies regardless of how much compensation that person earned or received. This means that even if a 5% owner earned very little or no compensation from the business, they are still considered a highly compensated employee for retirement plan purposes. This rule ensures that business owners with significant ownership stakes are subject to the same nondiscrimination testing as other highly compensated employees, preventing plans from favoring owners who might take minimal salary but still benefit substantially from plan contributions. The 5% ownership threshold is a bright-line test that focuses on ownership status rather than compensation level.
Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received
Publication 560 (2016), Retirement Plans for Small Business (IRS)
The top 20% election an employer may make
An employer has the option to limit the definition of highly compensated employee to those in the top 20% of employees when ranked by compensation. Without this election, an employee who earned more than $120,000 in the preceding year would automatically be classified as highly compensated. With the election, the employer can narrow the group to only those high earners who also rank in the top 20% by pay, which can reduce the number of employees subject to stricter nondiscrimination testing. This election is optional - the phrase "if you so choose" makes clear it is the employer's decision whether to apply this additional ranking requirement. The election must be applied consistently across the plan and affects which employees are counted as highly compensated for testing purposes in the current year. By using this election, employers with many moderately high-paid employees can potentially reduce their highly compensated employee count and improve the plan's ability to satisfy nondiscrimination requirements.
For the preceding year, received compen sation from you of more than $120,000 (if the preceding year is 2015, 2016 or 2017) and, if you so choose, was in the top 20% of employees when ranked by compensa tion.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
Key employees and the 60% top-heavy test
A retirement plan is considered top-heavy when it primarily benefits business owners and key employees rather than rank-and-file workers. The specific test measures whether the total value of account balances or accrued benefits for key employees exceeds 60% of the total value for all employees in the plan. When a plan fails this test and becomes top-heavy, additional requirements kick in to protect non-key employees, primarily requiring minimum benefits or contributions for those workers. Most qualified plans must include provisions that address top-heavy requirements, even if the plan is not currently top-heavy, so the rules are ready to take effect if the plan's composition changes. These requirements ensure that tax-qualified retirement plans serve a broad base of employees rather than functioning primarily as wealth accumulation vehicles for business owners and highly paid executives. The 60% threshold is the bright line that triggers these protective measures.
A plan is topheavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
A safe harbor plan skips the test entirely
When a plan is top-heavy, additional requirements kick in to protect rank-and-file workers through minimum benefits or contributions for non-key employees. However, certain plan designs are completely exempt from these top-heavy rules. SIMPLE 401(k) plans are automatically exempt. Safe harbor 401(k) plans are also exempt, but only if they consist solely of safe harbor contributions. This means the employer must limit all plan contributions to the safe harbor formula; if the employer adds any discretionary or matching contributions outside the safe harbor design, the plan loses this exemption and becomes subject to the top-heavy test. Qualified Automatic Contribution Arrangements (QACAs) also receive an exemption from top-heavy requirements. For employers seeking to avoid the administrative burden of top-heavy testing and the associated minimum contribution requirements for non-key employees, structuring the plan as a safe harbor 401(k) with only safe harbor contributions provides a straightforward path to exemption.
The topheavy plan requirements don't apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contribu tions, discussed later in this chapter.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
This year's HCE status is decided by last year's paycheck
An employee is treated as a highly compensated employee for 2016 based on what the employee earned in the prior year, not on what the employee earns in 2016 itself. Specifically, an individual is a highly compensated employee if, for the preceding year, the individual received compensation from the employer of more than $120,000 when the preceding year is 2015, 2016, or 2017. The employer may also choose to add a requirement that the employee was in the top 20% of employees ranked by compensation. Alternatively, an employee is treated as highly compensated if the employee owned more than 5% of the employer's business at any time during the year or the preceding year, regardless of compensation. Because the definition looks backward to the prior year's pay, an employee's HCE status for 2016 is fixed by the wages paid in 2015 (or, for the $120,000 threshold, by whether those wages exceeded $120,000 in a preceding year that falls within 2015, 2016, or 2017).
Highly compensated employee. A highly compensated employee is an individual who: Owned more than 5% of the interest in your business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or For the preceding year, received compen sation from you of more than $120,000 (if the preceding year is 2015, 2016 or 2017) and, if you so choose, was in the top 20% of employees when ranked by compensa tion.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
Contributing too much to highly compensated employees costs the employer an excise tax
When contributions made on behalf of your highly compensated employees fail the plan's nondiscrimination tests, the excess is an excess contribution, and the employer may owe a 10% excise tax on it. Two tests measure this: the actual deferral percentage test for elective deferrals, and the actual contribution percentage test for matching and after-tax employee contributions. Either one failing can trigger the tax if the excess is not corrected. The employer reports and pays the excise tax on Form 5330, separate from the plan's other annual filings. Both tests are excused for a safe harbor 401(k) plan or a QACA, and for other plan designs once certain additional conditions are met. Distributing the excess amounts to the affected highly compensated employees before the correction deadline avoids the tax; leaving the excess in the plan past that date is what triggers it.
contributions for highly compen sated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
How each figure was verified
Each number below was read from a stored copy of the document named beside it, and checked to occur word for word in the quoted sentence. The digest is of that stored text.
Notice 2015-75 (IRS)
- Highly compensated employee threshold
The limitation used in the definition of “highly compensated employee” under § 414(q)(1)(B) remains unchanged at $120,000.
- Key employee threshold
The dollar limitation under § 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan remains unchanged at $170,000.