Highly compensated employee for the purposes of retirement plans, a highly compensated employee is defined by the IRS as an employee who owns 5% or more of a company or receives compensation in excess of a predetermined amount.
To qualify for tax advantages, retirement plans cannot be overly favorable to highly compensated employees. The definition of HCE is crucial in determining whether plan benefits are allocated to HCEs in a discriminatory manner compared to nonhighly compensated employees.