What is a Highly Compensated Employee?

A Highly Compensated Employee (HCE) is defined either by ownership or compensation. An employee who owns, directly or indirectly, more than 5% of the company is an HCE. The Code has attribution rules and thus certain family members or others may be HCEs without direct ownership in the company. Also, compensation can make an employee an HCE. The determination is based on compensation earned in the prior year. The compensation amount is indexed for inflation and adjusts periodically per Treasury Regulations.