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Understanding Highly Compensated Employee [Internal Revenue] and Its Legal Implications
Definition & Meaning
A highly compensated employee, as defined by the Internal Revenue Code, refers to an employee who meets specific criteria regarding ownership and compensation. This designation is crucial for determining eligibility for certain benefits and retirement plans. Specifically, an employee qualifies as highly compensated if they:
Were a five-percent owner of the company at any point during the current or preceding year, or
Received compensation exceeding $80,000 in the previous year and, if applicable, was part of the employer's top-paid group for that same year.
Table of content
Legal Use & context
The term "highly compensated employee" is primarily used in the context of retirement plans and tax regulations. It is significant in determining compliance with various IRS regulations regarding pension, profit-sharing, and stock bonus plans. Understanding this designation helps employers manage their plans effectively and ensures compliance with tax laws. Users can utilize legal templates from US Legal Forms to navigate related documentation and procedures.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: Jane is a senior manager at a tech company. In the previous year, she earned $90,000 and was part of the top-paid group. Therefore, she qualifies as a highly compensated employee.
Example 2: John owns 10% of a small business. His ownership qualifies him as a highly compensated employee regardless of his salary. (hypothetical example)
Relevant laws & statutes
The definition of a highly compensated employee is outlined in 26 USCS § 414, which is part of the Internal Revenue Code. This statute governs the tax implications and regulations surrounding employee benefits and compensation.
Comparison with related terms
Term
Definition
Key Employee
An employee who is a top officer or owns a significant percentage of the business, often with different thresholds than a highly compensated employee.
Highly Paid Employee
A general term that may refer to employees with high salaries but does not necessarily include ownership criteria.
Common misunderstandings
What to do if this term applies to you
If you believe you qualify as a highly compensated employee, it is important to review your employer's retirement plan documents to understand your benefits. Consider consulting with a tax professional or legal advisor for personalized guidance. Additionally, explore US Legal Forms for templates that can assist you in managing related paperwork effectively.
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