2020 Highly Compensated Employee Threshold
For 2020, the Highly Compensated Employee Threshold is $130,000 (Highly compensated employee threshold) and $185,000 (Key employee threshold).
Effective 2020-01-01Source: Notice 2019-59 (IRS)Verified 2026-08-29
Compared with 2019
| Item | 2019 | 2020 | Change |
|---|---|---|---|
| Highly compensated employee threshold | $125,000 | $130,000 | +$5,000 (+4.0%) |
| Key employee threshold | $180,000 | $185,000 | +$5,000 (+2.8%) |
Who it applies to
Employers that sponsor qualified retirement plans and must determine whether employees are highly compensated employees under § 414(q) or key employees in a top-heavy plan under § 416.
What changed this year, and why
For 2020, the IRS raised the dollar threshold used to define a "highly compensated employee" under § 414(q)(1)(B) of the Internal Revenue Code to $130,000. The dollar limitation defining a "key employee" in a top-heavy plan under § 416(i)(1)(A)(i) rose to $185,000. Both adjustments took effect on January 1, 2020, as part of the annual cost-of-living adjustments announced in IRS Notice 2019-59.
Common questions
- What is the highly compensated employee threshold for 2020?
- Effective January 1, 2020, the threshold is $130,000. An employee who earned more than this amount in the prior year (or meets certain ownership tests) is classified as a highly compensated employee for plan-testing purposes.
- What is the key employee threshold for 2020?
- Effective January 1, 2020, the key employee compensation threshold is $185,000. This figure is used in determining which employees are key employees in a top-heavy plan.
The 5% owner test ignores what you are paid
An employee 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. This 5% ownership test is applied independently of the employee's pay. Even if a 5% owner earned very little compensation - or nothing at all - they still meet the definition of a highly compensated employee based solely on their ownership stake. For 2020, the alternative compensation-based threshold for highly compensated employee status is $130,000. Because the ownership test does not look at compensation, business owners and major shareholders must be counted as highly compensated employees for nondiscrimination testing purposes regardless of their salary. This means a plan that covers a 5% owner will always have at least one highly compensated employee in its testing population, which affects how the plan's coverage and contribution ratios are evaluated under IRS rules.
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 (2020), Retirement Plans for Small Business (IRS)
The top 20% election an employer may make
When determining who is a highly compensated employee for 2020, the employer can apply an optional test that combines a compensation floor with a ranking requirement. Under this test, an employee who received compensation of more than $130,000 in the preceding year qualifies as highly compensated only if the employer chooses to also require that the employee be in the top 20% of all employees when ranked by compensation. In other words, the top 20% election adds a second filter on top of the dollar threshold: employees paid above $130,000 are not automatically classified as highly compensated if the employer elects this additional condition. An employer may adopt this grouping rule to narrow the universe of highly compensated employees used in nondiscrimination testing. This election can affect the plan's test results, because a smaller group of highly compensated employees generally makes it easier for the plan to satisfy IRS requirements on coverage and contributions.
more than $130,000 (if the preceding year is 2020 and 2021), and, if you so choose, was in the top 20% of employees when ranked by compensation.
Publication 560 (2020), Retirement Plans for Small Business (IRS)
Key employees and the 60% top-heavy test
A plan is classified as top-heavy when it disproportionately benefits key employees over the general workforce. The test measures whether the total value of accrued benefits or account balances for key employees exceeds 60% of the total value of accrued benefits or account balances for all employees, based on the preceding plan year's data. When a plan fails this test and is deemed top-heavy, additional minimum benefit or contribution requirements apply for non-key employees to ensure they receive meaningful plan benefits. Key employees are generally defined as those meeting specific ownership or compensation thresholds established under section 416. The top-heavy rules serve as a safeguard to prevent retirement plans from primarily serving highly compensated individuals while providing inadequate benefits to rank-and-file workers. Plans must include provisions in their written documents that automatically trigger these additional requirements whenever the plan becomes top-heavy in any given year. Most qualified plans must contain these provisions regardless of whether they are currently top-heavy, so that the additional protections take effect immediately if needed.
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 (2020), Retirement Plans for Small Business (IRS)
A safe harbor plan skips the test entirely
Plans that meet safe harbor requirements are exempt from the top-heavy testing rules entirely. This exception applies to SIMPLE 401(k) plans and to safe harbor 401(k) plans that consist solely of safe harbor contributions. Because safe harbor plans already satisfy specific design requirements - such as providing mandatory employer contributions or matching contributions that meet IRS standards - they are relieved from having to undergo annual nondiscrimination testing, including the top-heavy test that compares key employee account balances to all employee account balances. This exemption simplifies plan administration by eliminating the need to track whether the plan becomes top-heavy each year. However, if a safe harbor 401(k) plan includes contributions beyond the safe harbor contributions, such as additional discretionary employer contributions, the plan may lose this exception and become subject to top-heavy testing requirements. Qualified automatic contribution arrangements also receive this same exemption from top-heavy requirements, further encouraging employers to adopt automatic enrollment features in their retirement plans.
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 (2020), 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 2019-59 (IRS)
- Highly compensated employee threshold
The limitation used in the definition of “highly compensated employee” under § 414(q)(1)(B) is increased from $125,000 to $130,000.
- 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 $180,000 to $185,000.