2018 Highly Compensated Employee Threshold
For 2018, the Highly Compensated Employee Threshold is $120,000 (Highly compensated employee threshold) and $175,000 (Key employee threshold).
Effective 2018-01-01Source: Notice 2017-64 (IRS)Verified 2026-08-29
Compared with 2017
Every figure on this page is unchanged from 2017.
| Item | 2017 | 2018 | Change |
|---|---|---|---|
| Highly compensated employee threshold | $120,000 | $120,000 | +$0 (+0.0%) |
| Key employee threshold | $175,000 | $175,000 | +$0 (+0.0%) |
Who it applies to
Employers that sponsor qualified retirement plans and must determine which employees are highly compensated employees or key employees for plan testing and top-heavy plan purposes.
What changed this year, and why
For 2018, the IRS published the cost-of-living adjusted limits for qualified retirement plans under IRC § 415(d) and related provisions, effective January 1, 2018. The dollar amount used to define a "highly compensated employee" under § 414(q)(1)(B) remained unchanged at $120,000. The dollar amount used to define a "key employee" in a top-heavy plan under § 416(i)(1)(A)(i) remained unchanged at $175,000.
Common questions
- What was the highly compensated employee threshold for 2018?
- For 2018, the threshold used to define a highly compensated employee under IRC § 414(q)(1)(B) was $120,000. This amount was unchanged from the prior year.
- What was the key employee threshold for 2018?
- For 2018, the threshold used to define a key employee in a top-heavy plan under IRC § 416(i)(1)(A)(i) was $175,000. This amount was unchanged from the prior year.
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 time during the current year or the preceding year. This determination applies regardless of the actual compensation that person received. The ownership threshold is the standalone test; earnings are irrelevant to whether the 5% test is met. If the individual passes this prong, they are a highly compensated employee even if their salary was zero. The alternative prong of the HCE definition looks at compensation - for 2018, an employee who earned more than $120,000 in the preceding year may also be highly compensated, but that is a separate inquiry from ownership. The 5% owner rule ensures that business owners who could otherwise pay themselves little or no salary are still counted among the highly compensated group, preventing plans from passing nondiscrimination coverage tests by underpaying their owners.
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 (2018), Retirement Plans for Small Business (IRS)
The top 20% election an employer may make
An employer may choose to classify as highly compensated only those employees who earned above the $120,000 compensation threshold in the preceding year AND who also ranked in the top 20% of all employees by compensation. This optional add-on is known as the top-paid-group election. Without this election, every employee who exceeded $120,000 is a highly compensated employee, regardless of where they fall relative to the rest of the workforce. With the election in place, a worker could earn more than $120,000 yet still not be an HCE if they are not in the top-paid 20% group. The election is available to the employer, not mandatory, so plan sponsors must affirmatively adopt it and apply it consistently. This provision gives employers flexibility to limit the HCE group in situations where many employees cross the dollar threshold but still represent a broad cross-section of the workforce rather than a privileged few.
For the preceding year, received compen- sation from you of more than $120,000 (if the preceding year is 2017 or 2018) and more than $125,000 (if the preceding year is 2019) and, if you so choose, was in the top 20% of employees when ranked by compensation.
Publication 560 (2018), Retirement Plans for Small Business (IRS)
Key employees and the 60% top-heavy test
A plan is classified as top-heavy when the total value of accrued benefits or account balances of key employees exceeds 60% of the total value for all employees, measured using the preceding plan year's figures. Key employees are the owners and officers who disproportionately benefit from the plan. Once a plan is top-heavy, additional minimum contribution and benefit requirements kick in to protect non-key employees. Most qualified plans must include top-heavy provisions in their documents even if the plan is not currently top-heavy, so those provisions activate automatically if the ratio crosses the threshold. A key employee earning up to $175,000 in compensation may be part of the group whose balances push the plan past the 60% mark. The rule exists to prevent plans that disproportionately favor insiders from retaining their tax-qualified status unless they also provide meaningful minimum benefits to the rank-and-file workforce.
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 (2018), Retirement Plans for Small Business (IRS)
A safe harbor plan skips the test entirely
Plans structured as safe harbor 401(k) plans that consist solely of safe harbor contributions are exempt from top-heavy plan requirements. This exception recognizes that safe harbor plans already satisfy nondiscrimination testing through mandatory employer contributions - either a matching contribution formula or a nonelective contribution for all eligible employees. Because these contributions automatically satisfy coverage and nondiscrimination rules, the additional burden of top-heavy testing and minimum benefits for non-key employees is unnecessary. The exemption also extends to SIMPLE 401(k) plans and plans with qualified automatic contribution arrangements (QACAs). Employers using these designs do not need to monitor whether key employee balances dominate the plan, simplifying plan administration. This carve-out rewards employers who choose the safe harbor path by reducing their compliance obligations in exchange for providing guaranteed minimum benefits to all participants.
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 (2018), 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 2017-64 (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 $175,000.