2023 Highly Compensated Employee Threshold
For 2023, the Highly Compensated Employee Threshold figures are $150,000 (Highly compensated employee threshold) and $215,000 (Key employee threshold).
Effective 2023-01-01Source: Notice 2022-55 (IRS)Verified 2026-09-03
Compared with 2022
| Item | 2022 | 2023 | Change |
|---|---|---|---|
| Highly compensated employee threshold | $135,000 | $150,000 | +$15,000 (+11.1%) |
| Key employee threshold | $200,000 | $215,000 | +$15,000 (+7.5%) |
Who it applies to
Employers sponsoring qualified retirement plans and the employees participating in those plans.
What changed this year, and why
Effective January 1, 2023, the IRS increased the highly compensated employee threshold under section 414(q)(1)(B) to $150,000. The key employee threshold under section 416(i)(1)(A)(i) was also raised to $215,000. These are annual cost-of-living adjustments that affect nondiscrimination testing for qualified retirement plans and top-heavy plan rules, respectively.
Common questions
- What does the highly compensated employee threshold mean for employers?
- Under section 414(q)(1)(B) of the Internal Revenue Code, the threshold determines which employees are classified as highly compensated for purposes of nondiscrimination testing in qualified retirement plans. For 2023, an employee earning above $150,000 in the prior year is considered highly compensated.
The 5% owner test ignores what you are paid
Under IRS rules for 2023, an individual is treated 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 test looks only at ownership, not at pay. It does not matter how much compensation the person earned or received; even an owner who took no salary at all still counts as highly compensated for that year. The 5% owner test is one of two ways to meet the definition. The other way depends on how much the person was paid in the preceding year, using a threshold of $150,000 for 2023. Because the ownership test and the compensation test are separate, an owner whose pay falls well below $150,000 can still be a highly compensated employee simply by virtue of holding a 5% or greater stake in the business at any point during the year or the year before.
Owned more than 5% of the interest in your business at any time during the year or the preceding year, re- gardless of how much compensation that person earned or received;
Publication 560 (2023), Retirement Plans for Small Business (IRS)
The top 20% election an employer may make
An employer may elect to treat an employee as highly compensated based on the top-paid-group test rather than solely on the compensation threshold. Under this election, the employer identifies the top 20% of employees when ranked by compensation for the preceding year. Only those employees who fall within that top-paid group and who also received compensation above the applicable dollar limit are counted as highly compensated through the compensation prong. This election can narrow the group of highly compensated employees compared to treating every worker above the threshold as highly compensated. The employer makes this choice voluntarily; it is not automatic. When the election is in effect, an employee who earned more than the threshold but was not in the top-paid group is not classified as highly compensated for testing purposes. This gives employers flexibility in how they define the group subject to nondiscrimination testing, particularly when the workforce includes many employees whose pay falls between the threshold and the upper ranges.
and, if you so choose, was in the top 20% of employees when ranked by compensation.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
Key employees and the 60% top-heavy test
A qualified retirement plan is classified as top-heavy for a plan year when, looking at the preceding plan year, the aggregate value of accrued benefits and account balances held by key employees exceeds 60% of the aggregate value held by all employees. The purpose of the top-heavy rules is to prevent plans from disproportionately favoring owners and other highly situated workers. A key employee is someone who meets certain ownership or compensation tests, including earning more than $215,000 in the preceding year for 2023. Once a plan is determined to be top-heavy, the plan must satisfy additional minimum contribution or minimum benefit requirements for non-key employees who are covered under the plan. Most qualified plans are required to contain provisions stating that these top-heavy requirements will take effect automatically in any plan year where the 60% threshold is met, even if the plan has not been top-heavy in prior years. The specific qualification rules for top-heavy plans are set out in section 416 of the code and its accompanying regulations.
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 em- ployees.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
A safe harbor plan skips the test entirely
Qualified retirement plans are generally required to satisfy top-heavy plan requirements, which impose minimum contribution or benefit obligations for non-key employees whenever the plan's key employees hold more than a specified share of the plan's total value. However, certain plan designs are entirely exempt from these requirements. A safe harbor 401(k) plan that consists solely of safe harbor contributions is not subject to the top-heavy plan requirements at all. This means that even if the plan's key employees hold virtually all of the plan assets, the employer operating a safe harbor 401(k) plan does not need to make the additional minimum contributions that a top-heavy plan would otherwise demand for non-key employees. The same exemption applies to SIMPLE 401(k) plans. The rationale is that safe harbor plans already provide guaranteed minimum employer contributions or matching formulas that satisfy nondiscrimination concerns without the need for separate top-heavy testing. Employers who design their plans to meet the safe harbor requirements therefore gain relief not only from ADP and ACP testing but also from the top-heavy rules.
The top-heavy plan requirements don't apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe har- bor 401(k) plans that consist solely of safe harbor contri- butions, discussed later in this chapter.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
This year's HCE status is decided by last year's paycheck
Whether an employee counts as highly compensated this year is not decided by what they are paid this year - it is decided by what they were paid in the preceding year. Anyone whose compensation from you in the prior year was more than $150,000, this record's own threshold, is a highly compensated employee for this year if you also choose to apply the top-paid group test and they were in the top 20% of employees ranked by pay; without that election, the compensation test alone is enough. Because compensation-based status runs a year behind pay, a raise that pushes someone over the threshold this year does not make them highly compensated until next year - and an employee who clears the threshold every year keeps that status without a gap, since each year's test is decided before that year begins.
increased to $150,000 for 2023), more than $155,000 (if the preceding year is 2024), and, if you so choose, was in the top 20% of employees when ranked by compensation.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
Contributing too much to highly compensated employees costs the employer an excise tax
When a retirement plan fails its nondiscrimination tests and shows that contributions on behalf of highly compensated employees exceed the permitted limits, the employer owes a 10% excise tax on the excess. The tax is calculated on the excess contributions for the plan year that ends within the employer's tax year. Excess contributions include elective deferrals, employee contributions, and employer matching or nonelective contributions that go beyond what the tests allow. The employer reports and pays this tax on Form 5330. The penalty is intended to discourage plans from disproportionately favoring higher-paid staff. Plans that qualify as safe harbor 401(k) arrangements or qualified automatic contribution arrangements are generally exempt from the tests that trigger this tax, so employers that meet those safe harbor conditions avoid the 10% excise-tax exposure altogether.
The tax for the year is 10% of the excess contributions for the plan year ending in your tax year.
Publication 560 (2023), 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 2022-55 (IRS)
- Highly compensated employee threshold
The limitation used in the definition of “highly compensated employee” under section 414(q)(1)(B) is increased from $135,000 to $150,000.
- Key employee threshold
The dollar limitation under section 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan is increased from $200,000 to $215,000.