3931 / Who is a key employee for purposes of the top-heavy rules for qualified plans?
A key employee for purposes of the top-heavy rules is any employee or, in some cases, a former or deceased employee who, at any time during the plan year containing the determination date for the plan year to be tested, is:
(1) an officer of the employer whose annual compensation from the employer exceeds $230,000 for 2025, $220,000 for 2024, $215,000 for 2023, $200,000 for 2022, $185,000 for 2020-2021,1 this amount is indexed for inflation in increments of $5,000);
(2) a more-than-5 percent owner of the employer; or
(3) a more-than-1 percent owner of the employer having annual compensation from the employer for a plan year in excess of $155,000; this amount is not indexed for inflation.2 (As to when the determination date occurs, see Q 3917.)
The determination as to whether an individual is an officer is made on the basis of all facts and circumstances; job titles are disregarded. An officer is an administrative executive who is in regular and continuous service, not a nominal officer whose administrative duties are limited to special and single transactions. A partner of a partnership will not be treated as an officer for purposes of the key employee test merely because he owns a capital or profits interest in the partnership, exercises his voting rights as a partner, and may, for limited purposes, be authorized and does in fact act as an agent of the partnership.3 Unincorporated associations, including partnerships and sole proprietorships, may have officers.4
In any case, the number of individuals treated as key employees because of their officer status is limited to the greater of three individuals or 10 percent of all employees, but in any event, not more than 50.5
Those employees who can be excluded when determining the number of employees in the top-paid group for purposes of identifying an employer's highly compensated employees ( Q 3930) also can be disregarded in determining the number of officers to be taken into account in identifying key employees.6 It is unclear how ties in compensation should be resolved. Whether an individual is a key employee because of his or her officer status is determined without regard to whether the individual is a key employee for any other reason.7
An individual owns more than 5 percent of a corporate employer if the individual owns more than 5 percent of the outstanding stock of the corporation by value or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation. In determining stock ownership, the attribution rules of IRC Section 318 apply, but stock is attributed from a corporation if a 5 percent rather than 50 percent ownership test is met. Only ownership in the particular employer is considered; the controlled group, common control, and affiliated service group aggregation rules of IRC Section 414 are disregarded. An individual owns more than 5 percent of a noncorporate employer if he or she owns more than 5 percent of the capital or profits interest in that employer. Rules similar to the attribution rules of IRC Section 318 apply for purposes of determining ownership in a noncorporate employer.8 The aggregation rules of IRC Section 414 are disregarded.9
The rules discussed in the previous paragraph also apply to determine whether an individual is a more-than-1-percent owner of the employer.10 All employers who are under common control or who are members of a controlled or affiliated service group ( Q 8964, Q 3935) are treated as one employer for the purpose of determining whether a more-than-1-percent owner has annual compensation from the employer in excess of $230,000 (as indexed for 2025 projected).
Compensation, for purposes of identifying key employees generally, is the compensation considered for purposes of the IRC Section 415 limits on contributions and benefits. Any elective or salary reductions contributions made on behalf of an employee to a 401(k) cash or deferred plan, simplified employee pension, 403(b) tax sheltered annuity, or cafeteria plan are included as compensation for purposes of IRC Section 415.11
For purposes of determining an employee's ownership in the employer, the attribution rules of IRC Section 318 and the aggregation rules of IRC Section 414 apply. If two employees have the same ownership interest in the employer, the employee who has the greater annual compensation from that employer will be treated as owning the larger interest.12
The terms employee and key employee include their respective beneficiaries.13
The term key employee is applied under various provisions of the IRC (e.g., IRC Sections 401(h), 415(l), and 419A). For these purposes, the term does not include any officer or employee covered by a governmental plan.14 Thus, the separate accounting and nondiscrimination rules under those provisions do not apply to employees covered by governmental plans.
1. Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-34.
2. IRC § 416(i); Notice 2012-67 (Dec. 10, 2012); Treas. Reg. § 1.416-1, T-12.
3. Treas. Reg. § 1.416-1, T-13; Rev. Rul. 80-314, 1980-2 CB 152.
4. Treas. Reg. § 1.416-1, T-15.
5. IRC § 416(i), flush language.
6. IRC §§ 416(i)(1), 414(q)(5).
7. Treas. Reg. § 1.416-1, T-14.
8. IRC § 416(i)(1)(C).
9. IRC § 416(i)(1)(B); Treas. Reg. §§ 1.416-1, T-17; 1.416-1, T-8.
10. Treas. Reg. § 1.416-1, T-16.
11. IRC §§ 416(i)(1)(D), 414(q)(4), 415(c)(3).
12. Treas. Reg. § 1.416-1, T-19.
13. IRC § 416(i)(5). Treas. Reg. § 1.416-1, T-12.
14. IRC § 416(i).