Quick Answer
A highly compensated employee (HCE) for 401(k) purposes is someone who earned over $155,000 in 2025 OR owned more than 5% of the company. For 2026, the threshold increases to $160,000. HCE status triggers additional 401(k) testing and may limit your contribution ability.
Best Answer
Marcus Rivera, Compensation & Benefits Analyst
Employees earning above the HCE threshold who need to understand how this affects their retirement planning
What qualifies you as a highly compensated employee?
The IRS defines a highly compensated employee (HCE) using two specific tests for the 2026 tax year:
1. Compensation test: You earned more than $160,000 in 2025 (the prior year)
2. Ownership test: You owned more than 5% of the company at any time during 2025 or 2026
You only need to meet ONE of these criteria to be classified as an HCE. The compensation threshold adjusts annually for inflation — it was $155,000 for 2025 and increases to $160,000 for 2026.
Example: Who qualifies as an HCE in 2026
Let's look at several scenarios:
How HCE compensation is calculated
The $160,000 threshold includes:
Important: The calculation uses your total compensation, not just your base salary.
Key factors that determine HCE status
What you should do
If you're approaching or exceeding the HCE threshold:
1. Calculate your total 2025 compensation including bonuses, 401(k) contributions, and benefits
2. Check with HR about your company's 401(k) testing results and any contribution limits
3. Consider Roth contributions if traditional 401(k) contributions become limited
4. Plan for next year if you expect income changes that might affect HCE status
Use our [paycheck calculator](paycheck-calculator) to model how HCE status might affect your take-home pay with different contribution strategies.
Key takeaway: You're an HCE if you earned over $160,000 in 2025 OR own more than 5% of your company. This status can limit your 401(k) contributions depending on your plan's test results.
Key Takeaway: You're an HCE if you earned over $160,000 in 2025 OR own more than 5% of your company. This status can limit your 401(k) contributions depending on your plan's test results.
2026 HCE qualification thresholds and examples
| Test Type | 2026 Threshold | Example | HCE Status |
|---|---|---|---|
| Compensation | $160,000 in 2025 | $165,000 salary | Yes |
| Compensation | $160,000 in 2025 | $145,000 salary | No |
| Ownership | More than 5% | 15% business owner | Yes |
| Ownership | More than 5% | 2% ownership stake | No |
| Combined | Either test | $140K salary + 8% owner | Yes |
More Perspectives
Sarah Chen, Payroll Tax Analyst
Workers with multiple employers who need to understand how combined income affects HCE status
HCE status with multiple employers
Working multiple jobs complicates HCE determination, especially if your employers are related companies or if you're comparing income across different 401(k) plans.
Separate employers: If you work for completely unrelated companies, your HCE status is determined separately for each employer's 401(k) plan. For example, if you earn $90,000 at Company A and $80,000 at Company B (total $170,000), you're NOT an HCE at either company individually since neither paid you over $160,000.
Related employers: If your employers are part of a controlled group (same ownership), the IRS requires combining your compensation. In this case, your $170,000 total would make you an HCE at both companies.
Practical implications: You might face 401(k) contribution limits at one job but not another, depending on each plan's testing results and your HCE status at that specific employer.
Key takeaway: Multiple job income is combined only if the employers are related companies — otherwise, HCE status is determined separately for each 401(k) plan.
Key Takeaway: Multiple job income is combined only if the employers are related companies — otherwise, HCE status is determined separately for each 401(k) plan.
Marcus Rivera, Compensation & Benefits Analyst
Older workers who may have ownership interests or high compensation affecting their final years of 401(k) contributions
HCE considerations for pre-retirees
As you approach retirement, HCE status becomes particularly important because it can limit your ability to maximize 401(k) contributions during your peak earning years.
Peak earning years: Many professionals earn their highest compensation in their 50s and 60s, making HCE status more likely. Combined with catch-up contributions ($7,500 additional for those 50+, or $11,250 for ages 60-63), the stakes are higher.
Ownership transitions: If you own part of your business and are planning succession, timing matters. Selling your ownership stake below 5% could change your HCE status for the following year, potentially allowing higher 401(k) contributions.
Example: A 55-year-old executive earning $180,000 is an HCE. If their company's 401(k) plan fails testing, they might be limited to contributing only $15,000 instead of the full $31,000 limit (including catch-up). That's a potential loss of $16,000 in tax-deferred savings — plus employer match they might miss.
Alternative strategies: Consider maximizing other retirement accounts (IRAs, HSAs) and exploring Roth conversions if 401(k) contributions become limited.
Key takeaway: HCE status can significantly impact your final years of retirement savings when contribution limits matter most — plan alternative strategies accordingly.
Key Takeaway: HCE status can significantly impact your final years of retirement savings when contribution limits matter most — plan alternative strategies accordingly.
Sources
- IRS Publication 560 — Retirement Plans for Small Business
- IRC Section 414(q) — Definition of Highly Compensated Employee
Reviewed by Marcus Rivera, Compensation & Benefits Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.