2021 Highly Compensated Employee Threshold
For 2021, the Highly Compensated Employee Threshold is $130,000 (Highly compensated employee threshold) and $185,000 (Key employee threshold).
Effective 2021-01-01Source: Notice 2020-79 (IRS)Verified 2026-08-29
Compared with 2020
Every figure on this page is unchanged from 2020.
| Item | 2020 | 2021 | Change |
|---|---|---|---|
| Highly compensated employee threshold | $130,000 | $130,000 | +$0 (+0.0%) |
| Key employee threshold | $185,000 | $185,000 | +$0 (+0.0%) |
Who it applies to
Employers sponsoring qualified retirement plans that must perform annual nondiscrimination and top-heavy testing using the IRS definitions of highly compensated employees and key employees.
What changed this year, and why
The highly compensated employee threshold under IRC § 414(q)(1)(B) remains unchanged at $130,000 for 2021, as published by the IRS in Notice 2020-79. The key employee threshold under § 416(i)(1)(A)(i) also remains unchanged at $185,000 for 2021.
Common questions
- What is the highly compensated employee threshold for 2021?
- The threshold is $130,000. An employee who earned more than this amount in the prior year is classified as highly compensated for plan-testing purposes under IRC § 414(q)(1)(B).
- Did the highly compensated employee threshold change from 2020 to 2021?
- No. The threshold remained at $130,000, the same as in 2020.
- What is the key employee threshold for 2021?
- Yes. The key employee threshold under § 416(i)(1)(A)(i) for top-heavy plans is $185,000 for 2021, unchanged from 2020.
The 5% owner test ignores what you are paid
Under the highly compensated employee definition, an individual is classified as highly compensated if they owned more than 5% of the interest in the business at any time during the year or the preceding year. The critical point here is that this test is based entirely on ownership percentage, not on compensation. Even if a 5% owner earned very little or no salary during the year, they still meet the definition of a highly compensated employee solely because of their ownership stake. This differs from the compensation-based test, where an employee must have received more than $130,000 in the preceding year (for 2020 or 2021) to be considered highly compensated. The ownership test looks back at both the current year and the preceding year, meaning someone who owned more than 5% at any point during either period triggers this classification. Employers must track ownership percentages carefully, as a 5% owner cannot avoid highly compensated employee status through reduced compensation or other arrangements.
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
Publication 560 (2021), Retirement Plans for Small Business (IRS)
The top 20% election an employer may make
When defining highly compensated employees, employers may apply an additional filter beyond the compensation threshold. After identifying employees who earned above the annual limit in the preceding year, the employer can choose to further restrict the group to only those who ranked in the top 20% of all employees by compensation. This election narrows the pool of highly compensated employees used in nondiscrimination testing. Without this choice, every employee earning above the dollar threshold counts as highly compensated regardless of where they fall in the overall workforce distribution. The top-paid group election gives employers flexibility to exclude long-tenured lower-paid workers from HCE status when those workers earned above the threshold but still rank in the lower portion of the workforce by pay. Employers must make this election consistently and apply it across the entire employee population.
and, if you so choose, was in the top 20% of employees when ranked by compensation.
Publication 560 (2021), Retirement Plans for Small Business (IRS)
Key employees and the 60% top-heavy test
A qualified retirement plan becomes top-heavy when the value of accrued benefits or account balances for key employees exceeds 60% of the total value for all employees, measured using the preceding plan year's figures. When this test is met, the plan must satisfy additional requirements designed to protect non-key employees, including minimum vesting schedules and minimum contribution or benefit levels. The top-heavy rules apply automatically each year based on the composition of the plan's participants - plans must contain provisions that activate these requirements whenever the plan is top-heavy. Key employees include officers, certain owners, and highly compensated employees who meet specific ownership criteria. Employers must track the distribution of plan benefits among employee categories to determine whether the top-heavy threshold is triggered.
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 (2021), Retirement Plans for Small Business (IRS)
A safe harbor plan skips the test entirely
Certain plan designs are exempt from top-heavy requirements entirely, eliminating the need to run the annual top-heavy test. SIMPLE 401(k) plans and safe harbor 401(k) plans that consist solely of safe harbor contributions do not have to satisfy top-heavy plan rules. Qualified automatic contribution arrangements also fall outside these requirements. The exemption recognizes that safe harbor plans already meet nondiscrimination standards through their design - by providing mandatory employer contributions or matching formulas that satisfy actual deferral percentage and actual contribution percentage tests automatically - so adding top-heavy minimums would be redundant. Employers using these plan designs can skip the annual top-heavy analysis and the associated minimum vesting and contribution obligations that apply to other qualified plans. This simplifies administration and reduces compliance costs.
SIMPLE and safe harbor 401(k) plan ex- ception. 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 (2021), 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 2020-79 (IRS)
- Highly compensated employee threshold
The limitation used in the definition of “highly compensated employee” under § 414(q)(1)(B) remains unchanged at $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 remains unchanged at $185,000.