401(k) glossary
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Testing & compliance
Key employee
Short definition
A key employee is an owner or officer who meets IRS thresholds used for the top-heavy test. For 2026 it means an officer paid more than $235,000, a more-than-5% owner, or a more-than-1% owner paid over $150,000. For 2027 the officer pay threshold rises to $245,000.
What a key employee is
Section 416 of the tax code defines a key employee as anyone who, at any time during the plan year, was:
For 2027 the officer pay threshold rises to $245,000. (IRS Notice 2026-66)
An officer with annual compensation above $235,000 (the 2026 figure, up from $230,000 in 2025).
An owner of more than 5% of the business, whatever they are paid.
An owner of more than 1% of the business with annual compensation above $150,000. This figure is not indexed.
Family attribution applies, so close relatives of an owner can be key employees. The number of officers counted is capped at 50, or for smaller employers at the greater of 3 employees or 10% of employees.
Why it matters to employers
Key employees matter for one test in a 401(k): the top-heavy test. If key employees hold more than 60% of plan assets, the employer generally owes non-key employees a contribution of at least 3% of pay. The definition also appears in rules for other benefits, such as cafeteria plans.
Key employee and HCE compared
Key employee | Highly compensated employee | |
|---|---|---|
Used for | Top-heavy test | ADP, ACP and coverage tests |
Pay test for 2026 | Officers above $235,000 | Above $160,000 in 2025 |
Ownership | More than 5%, or more than 1% with pay over $150,000 | More than 5% |
Common mistakes
Using the HCE list for the top-heavy test.
Treating a job title as proof of officer status. What counts is real authority, not the title on a business card.
Missing a former key employee’s balance in the calculation.
Overlooking spouses and children of owners who are on payroll.
Sources
Internal Revenue Service: Notice 2025-67: 2026 amounts relating to retirement plans and IRAs (https://www.irs.gov/pub/irs-drop/n-25-67.pdf), retrieved 2026-11-11 U.S. Code (govinfo.gov): 26 U.S.C. 416: Special rules for top-heavy plans (https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapD-partI-subpartB-sec416.htm), retrieved 2026-11-11 eCFR (National Archives): 26 CFR 1.416-1: Questions and answers on top-heavy plans (https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.416-1), retrieved 2026-11-11 Internal Revenue Service: Is my 401(k) top-heavy? (https://www.irs.gov/retirement-plans/is-my-401k-top-heavy), retrieved 2026-11-11 Internal Revenue Service: Notice 2026-66: 2027 amounts relating to retirement plans and IRAs (https://www.irs.gov/pub/irs-drop/n-26-66.pdf), retrieved 2026-11-13
General information, not legal or tax advice.
