2017 Highly Compensated Employee Threshold
For 2017, the Highly Compensated Employee Threshold figures are $120,000 (Highly compensated employee threshold) and $175,000 (Key employee threshold).
Effective 2017-01-01Source: Notice 2016-62 (IRS)Verified 2026-09-03
Compared with 2016
| Item | 2016 | 2017 | Change |
|---|---|---|---|
| Highly compensated employee threshold | $120,000 | $120,000 | +$0 (+0.0%) |
| Key employee threshold | $170,000 | $175,000 | +$5,000 (+2.9%) |
Who it applies to
Employers sponsoring qualified retirement plans and employees whose compensation is evaluated for nondiscrimination testing or top-heavy plan classification under the Internal Revenue Code.
What changed this year, and why
The IRS announced the 2017 cost-of-living adjustments for retirement plan limits under IRC § 415(d). The highly compensated employee threshold under § 414(q)(1)(B) remains unchanged at $120,000 for 2017. The key employee threshold under § 416(i)(1)(A)(i) increased to $175,000 for 2017.
Common questions
- What is the highly compensated employee threshold for 2017?
- The highly compensated employee threshold for 2017 is $120,000, effective January 1, 2017. This is the amount used under IRC § 414(q)(1)(B) to determine whether an employee is classified as highly compensated for purposes of retirement plan nondiscrimination testing.
- Did the highly compensated employee threshold change from previous years for 2017?
- No. The threshold remained at $120,000, the same as in prior years.
- What is the key employee threshold for 2017?
- The key employee threshold for top-heavy plans, defined under IRC § 416(i)(1)(A)(i), was increased to $175,000 for 2017, effective January 1, 2017.
The 5% owner test ignores what you are paid
Under IRS rules, an individual is classified as a highly compensated employee if they owned more than 5% of the interest in the business at any point during the current year or the preceding year. This determination applies regardless of how much compensation that person actually earned or received from the business. This means that even if a 5% owner earned very little or no salary, they are still considered highly compensated for retirement plan testing purposes. The 5% ownership test operates independently from the compensation-based test, which uses a threshold of $120,000 for 2017. This distinction matters because 5% owners are automatically included in the highly compensated employee category without regard to their actual pay level, while other employees must meet the compensation threshold to be classified as highly compensated.
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 (2017), Retirement Plans for Small Business (IRS)
The top 20% election an employer may make
Employers have the option to require that employees in the top 20% when ranked by compensation be included in the definition of highly compensated employee, in addition to those who received more than $120,000 in the preceding year. This election is optional. If made, it broadens the group of highly compensated employees by pulling in the highest-paid workers even if their pay did not exceed the dollar threshold. If not made, only those who earned more than $120,000 in the prior year are counted. The choice affects how many employees are subject to nondiscrimination testing as highly compensated.
For the preceding year, received compen- sation from you of more than $120,000 (if the preceding year is 2016, 2017, or 2018) and, if you so choose, was in the top 20% of employees when ranked by compensa- tion
Publication 560 (2017), Retirement Plans for Small Business (IRS)
Key employees and the 60% top-heavy test
A plan is top-heavy when, for the preceding plan year, the total value of accrued benefits or account balances of key employees exceeds 60% of the total for all employees. A key employee is someone who, among other tests, received more than $175,000 in compensation from the employer. Once a plan is classified as top-heavy, additional rules apply to protect non-key employees, primarily by requiring minimum contributions or benefits for them. Plans that are not currently top-heavy must still include provisions that will activate these requirements if the plan becomes top-heavy in a future year.
A plan is top-heavy 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 (2017), Retirement Plans for Small Business (IRS)
A safe harbor plan skips the test entirely
Certain plan designs are automatically treated as satisfying the top-heavy rules and do not have to apply the top-heavy percentage test at all. Specifically, the top-heavy requirements do not apply to SIMPLE 401(k) plans or to safe harbor 401(k) plans that consist solely of safe harbor contributions. Qualified automatic contribution arrangements (QACAs) are also exempt from these requirements. This means that a safe harbor 401(k) plan meeting the applicable conditions can operate without calculating whether key employees hold a disproportionate share of plan assets, simplifying administration and avoiding the additional minimum contribution obligations that top-heavy status would otherwise impose on non-key employees.
The top-heavy 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 (2017), Retirement Plans for Small Business (IRS)
This year's HCE status is decided by last year's paycheck
In the United States, an employee's status as a highly compensated employee for the current year depends on what happened in the prior year. The IRS definition has two prongs. First, anyone who owned more than 5% of the employer's business at any time during the current year or the preceding year is a highly compensated employee, no matter how much they earned. Second, an employee who received more than $120,000 in compensation from the employer during the preceding year is also a highly compensated employee, if the preceding year is 2016, 2017, or 2018. Under that second prong, the employer may additionally require the employee to rank in the top 20% of all employees by compensation. For 2017 purposes, then, the employer looks at each worker's 2016 pay: if it exceeded $120,000, that worker enters 2017 classified as highly compensated. The lookback is important because it means employers must identify their highly compensated employees at the start of the plan year, using payroll data that is already complete, rather than waiting to see who earns the most during the year itself.
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 2016, 2017, or 2018) and, if you so choose, was in the top 20% of employees when ranked by compensa- tion.
Publication 560 (2017), 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 compensated employ- ees are more than the test limits for these con- tributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330.
Publication 560 (2017), 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 2016-62 (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 is increased from $170,000 to $175,000.