Key employee, in U.S.
Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
(IRS) terminology, is an employee classification used when determining if company-sponsored
qualified retirement plan
A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire ...
s, including
401(a)
In the United States, a 401(a) plan is a tax-deferred retirement savings plan defined by subsection 401(a) of the Internal Revenue Code. The 401(a) plan is established by an employer, and allows for contributions by the employer or both employer an ...
defined benefit plan
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, ...
s and
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
s, are considered "top-heavy" or, in other words, weighted towards the company's more highly compensated individuals.
A key employee is defined by the IRS as an employee, either living or dead, who meets one of the following three criteria:
*An officer making over $175,000 in 2018 or $180,000 in 2019 (the income threshold is indexed by the IRS and may increase each year);
*A 5% owner of the business (defined as one who either owns more than 5% of the business, or is credited with more than 5% ownership of the business through Family-Attribution Rules), or
*An employee owning more than 1% of the business and making over $150,000 for the plan year.
All other employees are referred to as non-key employees.
There are some similarities between key employees and so-called
highly compensated employees (HCE), but the compensation salary threshold is lower for HCEs, at only $120,000 versus $150,000 for key employees.
See also
*
Key person insurance
Key person insurance, also called keyman insurance, is an important form of business insurance. There is no legal definition of "key person insurance". In general, it can be described as an insurance policy taken out by a business to compensate tha ...
References
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United States tax law
Retirement plans in the United States